Striking the perfect balance is one of life’s most enduring pursuits. It is central to many of the world’s great religions and plays an integral part in the daily decisions we make and the relationships we form. Even our folk tales and fables are often about its achievement, but while Goldilocks found a suitable meal and comfortable bed quickly enough in her story, finding equilibrium in the real world can prove to be a far harder task.

Canadians have learned that lesson all too well so far this decade, particularly those with a vested interest in the economy and its growing dependence on the interplay between oil prices and the loonie. Both have dropped in dramatic lockstep over the past year, but just how bad the fall has been largely depends on whom you ask.

Folks in Alberta are rightly anxious about crude’s 50% descent to a low of US$43 a barrel in March from above US$100 last June. At the latter price, the province’s economy was humming along just fine, but even at current levels closer to US$50, oil-sands producers are barely breaking even and the fallout from capital-spending cutbacks and job losses is already being felt by the province’s economy.

Residents in provinces that are more reliant on manufacturing and tourism, however, have fewer qualms about plummeting oil prices and a less-than-sparkling loonie. Following a few years of complaining about the Canadian dollar being near or at par with the U.S. dollar, they are likely relieved by the swoon in the loonie to a recent low of US78¢ because it makes goods manufactured in the country more attractive on the export market, and turns Canada into a more enticing destination for foreign travellers.

Clearly, the ebb and flow of oil prices and our petrocurrency helps create imbalances across the country, which begs some questions: What level for each would create a better balanced economy? And, even more importantly, are those levels even achievable?

In a perfect world, Doug Porter, chief economist at BMO Capital Markets, says oil would be US$100 a barrel and the dollar would be US80¢, but that’s not likely realistic given the interplay between both prices. “If oil returned to $100, the Canadian dollar wouldn’t stay at US80¢,” he says.
“Besides, this balance wouldn’t be good for consumers either, because higher oil prices create higher import prices.”

As a result, Porter says, the perfect balance depends on which region and which industry you are in, but, broadly speaking, he thinks US$70 oil and a US85¢ loonie would be close to ideal for the overall economy, including producers and consumers, as well as the energy industry and other sectors. “US$70 is likely just high enough to make new investments viable,” he says. “As for the exchange rate, US85¢ is very close to purchasing power parity and close to a level at which manufacturing and tourism can compete.”

Porter anticipates getting close to this balance over the medium term and both predictions are close to his price forecast for 2017. “We have oil at US$65 in 2016 and the Canadian dollar averaging just over US80¢, but I think US$70-75 oil is very realistic, as is an exchange rate around the mid-80s,” he says. “We were actually quite close to this perfect balance in November of last year. Sadly, it lasted about a week.”

Patricia Mohr, a vice-president and commodity market specialist at Scotiabank, thinks the “sweet spot” would peg West Texas Intermediate (WTI) oil prices at US$75-80 and a Canadian dollar at US85¢. “This combination would provide lucrative profits for the Canadian oil patch — probably Canada’s most important industry — but also be consistent with a competitive currency for both manufacturers and resource producers across Canada.”

Unfortunately, oil prices are likely to remain below this level in the next two years, she adds, with crude strengthening to the US$65 mark by late 2015 and possibly US$70-75 by 2017. “Oil prices are likely to be quite volatile, with production from U.S. shale swinging up and down with stronger and then weaker prices,” she says.

If the relationship between oil prices and the Canadian dollar is a fickle one, it is one that can’t be denied and it now wields more influence on the health of the economy and capital markets than perhaps ever before. The loonie has firmly become a petrocurrency since the turn of the century, but it hasn’t always been, points out Werner Antweiler of the University of British Columbia’s Sauder School of Business, in a recent report.

A petrocurrency, he explains, is a currency of an oil-producing country such as Canada whose oil exports as a share of total exports are sufficiently large enough that the currency’s value rises and falls along with the price of oil. “In other words, a petrocurrency appreciates when the oil price rises and depreciates when the oil price falls,” he said in the report. Until recently, commodity prices were not considered a major catalyst of exchange rates. Instead, the value of currencies, including the Canadian dollar, was thought to be largely determined by supply and demand and their deviation from purchasing power parity, a theory that states that exchange rates between two currencies are in equilibrium when their purchasing power is the same in each of the two respective countries.

Antweiler noted oil prices were relatively flat before the turn of the century and their effect on the Canadian dollar remained very small, with energy’s share in trade hovering around the 5% mark during the 1980s and 1990s. Since then, however, energy’s share of trade has nearly tripled to about 15% and, with it, oil’s effect on the loonie has dramatically increased. “This is even more pronounced when one only looks at exports, where that share has reached 25% by 2014,” he said. “That is what has fundamentally shifted and can explain why oil prices matter a whole lot more than they did a decade or two earlier.”

Antweiler believes the correlation between oil prices and the Canadian dollar has been particularly strong over the past 15 years with roughly 90% of the variation in the exchange rate of the loonie against the U.S. dollar accounted for by changes in the price of crude. Moreover, for every US$1 increase in the WTI benchmark oil price, there is a subsequent appreciation in the Canadian dollar of US0.417¢.

Based on this data, Antweiler predicts that a Canadian dollar should buy about US99.8¢ when WTI is US$100 and buy only about US83.12¢ when oil trades at US$60. “As long as oil exports remain a strong component of Canada’s exports, oil prices will influence the value of the Canadian dollar,” he said. “If the share of oil and gas exports increases further, the link between oil prices and the exchange rate may become even stronger.”

If that’s true, optimizing the relationship for the benefit of the broader economy will remain a challenge, one that may or may not be worth the bother depending on your perspective. “The notion of perfect probably doesn’t even exist in theory and certainly doesn’t exist in practice,” says David Wolf, a portfolio manager at Fidelity Investments, who believes the loonie needs to be at US80¢ in order for the Canadian economy to stay competitive. “Even if there were a perfect level, figuring it out is beyond even the most sophisticated economist.”

Wolf is a past adviser to Mark Carney, the former governor of the Bank of Canada, and believes it is virtually impossible to please everyone involved in an economy as dynamic as Canada’s since what might be good for one region of the country may not be good for the other and vice versa. As a result, whether it’s oil prices and the loonie or other asset prices, it is the difficult job of policymakers to recognize how they work in concert and at which levels they will provide maximum benefit to the economy as a whole, even if it is not equally beneficial to every sector, industry, company or individual.

Even then, it’s largely out of their hands whether an optimal mix can be achieved. “If it is a matter of making everybody happy, nothing is going to make everybody happy,” Wolf says. “So the standard is a backdrop of prices that everybody can live with.”

Therefore, optimization, not perfection, is a more realistic goal for central bankers and economists, but even then the influence of broader markets on asset prices is far more important.

As a portfolio manager, Wolf is well aware of this and is far less concerned about the optimal level of oil prices in relation to the Canadian dollar, and more concerned about whether investors are pricing them correctly. “An economist or policymaker is going to think about trying to get things optimal, but we just want to get it right,” he says. “One of the real fundamental questions we think about answering when making investment decisions is: Given the world we have, how do we expect it to evolve?”

A great example of this, Wolf says, was at the beginning of 2015 when markets seemed certain that interest rates were not going down in Canada. To him, it seemed unreasonable to assume such an outcome, especially given the recent oil shock and likely implications for the economy. Lo and behold, the Bank of Canada in late January announced to almost everyone’s surprise a 25-basis point reduction in the overnight lending rate. “We like it when the market is thinking something that it has no business being so sure about,” he says.

Wolf’s pragmatic approach doesn’t always pan out, of course, but it is one that others may want to adopt since even though oil prices and the Canadian dollar may eventually reach a better balance, it may never be perfect.

]]>http://business.financialpost.com/financial-post-magazine/in-a-perfect-world-oil-would-be-100-and-the-loonie-80-cents-too-bad-thats-never-going-to-happen/feed0stdoilloonie_blomThe year that broke oil: What’s the damage and where does Canada go from here?http://business.financialpost.com/financial-post-magazine/the-year-that-broke-oil-whats-the-damage-and-where-does-canada-go-from-here
http://business.financialpost.com/financial-post-magazine/the-year-that-broke-oil-whats-the-damage-and-where-does-canada-go-from-here#commentsFri, 24 Jul 2015 19:24:06 +0000http://business.financialpost.com/?p=570653

Conditions in the oil industry couldn’t have seemed better a year ago. Economies around the world were still rebounding from the 2008/09 recession and West Texas Intermediate oil on June 25, 2014, was cruising along at US$106.50. But that was as high as WTI would get that year since it started sliding the next day, a slide that only picked up steam with the Organization of the Petroleum Exporting Countries’ decision — led by Saudi Arabia — in November to cut prices to defend its market share from those pesky U.S. shale-oil frackers. Oil bottomed at US$43.46 on March 26 this year before beginning a volatile and tepid recovery to above US$55 by the beginning of June. Friday it was down to $48.20.

The Year That Broke Oil

BloombergThis graph shows WTI's decline over the past year.

But the damage had already been done.

Energy companies, particularly in Canada, started cutting planned capital expenditures, head counts and existing operations, and revenues and profits plunged. As a result, such companies mostly dropped on the FP500 ranking — for example, last year’s No. 1, Suncor Energy Inc., slid all the way to No. 7 — as did the banks, which depend on a comfy economic environment to soothe investor fears about household debt levels and possible housing crunches. And that’s even though only two quarters of oil’s price slide is included in the FP500 tally. The effect has shown up even more prominently on the stock market. The biggest market cap drop, as of May 4, 2015, from a year ago was $7.6 billion by Husky Energy Inc., with Encana Corp. and Cenovus Energy Inc. rounding out the top three.

BloombergHarold Hamm, the billionaire founder and CEO of Continental Resources Inc., filed an appeal of a US$1-billion divorce settlement for his ex-wife.

Things in the global oil patch got so bad that Harold Hamm, the billionaire founder and CEO of Continental Resources Inc., in December filed an appeal of a US$1-billion divorce settlement for his ex-wife, saying his wallet had been hit hard by oil’s price drop from over US$100 a barrel to less than US$60 at the time. He later cut a cheque for the full amount, and his wife launched an appeal asking for more, which was denied.

But if history has taught us anything, it’s that it repeats. It’s not a question of if oil prices will recover as much as it is when. But then what?

Canadian energy companies have been slashing their head counts, operations and planned capital expenditures to the bone in response to oil’s price slide. Ramping it all back up won’t be easy, especially since it may take a while before they have some degree of confidence that higher prices, when they do return, are back for the foreseeable future. But in the meantime, production levels have barely budged. Indeed, they are actually higher.

Part of the reason is that the Persian Gulf countries haven’t slowed down their activity as they attempt to regain market share from U.S. shale producers and Russia. The Russian part of the equation may take care of itself since sanctions will hurt its access to Western capital and probably prevent multinational oil companies from entering due to fear of reprisals, particularly from the U.S. government. There has also been increased demand as gas prices decline, especially from the U.S., but also the eurozone and parts of Asia and Latin America. Some believe the summer driving season in the U.S. will be the best one in a decade.

Heavy crude is our strength in Canada

But even Canadian heavy oil from the oil sands continues to increase flows to the U.S. The full Keystone XL pipeline may be hung up in U.S. red tape — and may never get built — but the southern leg from Cushing, Okla, to Houston has been expanded, the new Flanagan pipeline is up and running, and rail terminal expansions to carry crude by rail are expected to open in the second half of this year. And the refineries in Houston and along the Gulf Coast are heavily configured to run on heavy crude, so they need to buy Canada. “Heavy crude is our strength in Canada,” says Patricia Mohr, a Scotiabank economist and commodity specialist. “It’s our forte.”

So why all the doom and gloom about Canada’s energy sector? A lot has to do with the huge cuts to drilling and exploration programs. Estimates are in the 40 per cent range, which is hurting all the oil-field service providers that supply equipment, manpower and services to facilitate those programs. As a result, production and exports may level off next year and it may be a while before the sector starts rising again. “It’s going to take at least 18 months, maybe two years, for things to really come back,” Mohr says. “There’s a lot of very negative geopolitical developments in the Middle East, but it doesn’t seem to have done much to oil prices.”

Getty ImagesAn oil tanker is seen off the port of Bandar Abbas, southern Iran. Many analysts estimate that Iran has piled up tens of millions of barrels on floating barges that can be exported soon after sanctions have been lifted.

Even the most optimistic don’t believe oil is returning to the US$100 mark anytime soon. Global production is still going strong despite the decrease in price, OPEC doesn’t seem to have any intention of slowing down, and there’s the possibility that Iranian supplies could start coming back this year if sanctions related to its nuclear capability are lifted soon. The U.S. Energy Information Administration said the re-introduction of more oil from Iran could cut its price projection by up to US$15 a barrel.

Investment banker Goldman Sachs is one of the most pessimistic about oil prices. In May, it cited improved U.S. shale efficiency and unimpeded OPEC productivity while pegging a US$45 price on WTI by October and predicting Brent will only be US$55 in five years. It called the price increase in late spring a “self-defeating rally.” But even that depressing call was dwarfed by Citigroup’s belief in February that oil would hit US$20 at some point and that the slide had broken OPEC.

Pessimism aside, it’s tempting to look at the last time oil prices precipitously dropped to get a clue about what might happen this time, but the current global environment is quite a bit different than in December 2008, near the bottom of the commodity cycle when oil hit US$32. That was also in the depths of the last recession, but China saved the day that time. China implemented a huge expansion of credit and infrastructure development that lifted its economy well above the global recession and nudged others out of negative territory as well because of its massive need for commodities, including oil.

AP Photo/Brennan LinsleyA worker uses hand signals to communicate with a co-worker over the sound of massive pumps at an Encana Oil & Gas (USA) Inc. hydraulic fracturing and extraction site, outside Rifle, in western Colorado. U.S. shale is a new wildcard that wasn’t really around in 2009.

“The minute that oil traders saw China buying commodities at bargain basement prices in early ’09, all the traders jumped back into their positions and drove the prices up,” Mohr says. “Things recovered very quickly, and not only oil, but commodity prices generally.” She adds that although China is once again ramping up stimulus efforts to achieve its 7% growth target, its economy doesn’t have quite the same wherewithal to boost both its own growth and that of everyone else.

Mohr, who correctly called the recent mini-recovery in oil prices, believes oil will be back up to US$65 by late this year, though there will be some volatility, but that level isn’t expected to increase much next year and she has oil only hitting US$70 in 2017.

But at US$65, some of the U.S. shale producers will likely increase production. U.S. shale is a new wildcard that wasn’t really around in 2009. Perry Sadorsky, associate professor of economics at the Schulich School of Business in Toronto, says the behavior of frackers as swing producers now has a strong effect on the fortunes, or lack thereof, of Canadian oil producers. At US$57, he says some frackers are making good money, while others may be mothballing some operations. But if prices go higher, all the offline frackers are going to start producing, flood the North American market with more oil, and put further pressure on oil prices to drop. The Gulf states are covered since they can make money at US$20 a barrel. “Some people are concerned about what we call a W-shaped pattern for oil prices,” he says. “They fell a lot last year, rebounded a bit now and if it bounces back a little higher, then all the frackers are going to go back online and prices will plummet again.”

Many investors are afraid of that very thing since the futures market was trading oil in May for delivery a year later at US$60. Go out 18 months, and oil was still about the same level. “The big overriding factor is that you have this huge supply relative to weak demand globally,” Sadorsky says. “If you see more fracking around the world, you could see $50 a barrel for oil for probably the next five to 10 years and that’s pretty scary if you’re hoping for a quick rebound in Alberta.”

Sadorsky believes anything over US$80 a barrel would be unjustified given the amount of oil being produced, not to mention the amount of oil sitting in tankers, tank cars and storage facilities, as well as the technology that is making it possible to produce more in a cost-effective manner.

“If you think fracking has a long future, you’re certainly going to delay any huge capital expenditures. The one thing about fracking is that frack wells only last about five to seven years. They run out real quick, which is why there is so much activity in that drilling sector,” he says. “On the other hand, there’s so much fracked oil available in the U.S. that they are going to be permanently self-sufficient in a few years and that could last for 30 or 40 years.”

Peter Tertzakian, chief energy economist and managing director at ARC Financial Corp., an energy-focused private equity firm in Calgary, agrees that it won’t be good enough for prices to rise, it will have to be sustained before energy company executives will be inclined to move ahead and start rehiring. “I would say the price of oil has to rise above $70 and sustain for a couple of quarters, without fear of retreat,” he says.

Martin Pelletier, a portfolio manager at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment management firm, is a bit more optimistic. He says it would probably take about eight months for energy companies to feel comfortable that a higher price was here to stay, or about the same time it took for them start cutting jobs and projects. They will, of course, be initially gun shy, but it won’t take long to become optimistic when oil is rising. “It depends on how much capital they can raise and how quickly,” Pelletier says. “In today’s low interest rate environment, perhaps quicker than in the past.”

Tertzakian, though, says the decision to ramp spending back up depends on what segment of the industry a company is in. Big oil-sands projects (those that require more than a few billion dollars in capital spending) will be a long time coming, he says, while unconventional oil projects will ramp up much faster, probably within a quarter.

CenovusCenovus Energy Inc. has some bitumen projects that could be economic at US$40-$50 oil.

As Mohr says, the Canadian sector has turned cautious. But she also points out that there are still some projects on the go. A company such as Cenovus Energy Inc. has quite economic SAGD (steam assisted gravity drainage) bitumen projects that they’re proceeding with at Foster Lake and Christina Lake. Mohr says these projects can be economic at US$40-$50 WTI. Canadian Natural Resources Ltd. will probably keep moving ahead with its Horizons Lake field, while the Fort Hills oil-sands project will likely keep Suncor Energy Inc. and its partners busy. But, she adds, “companies with weaker balance sheets will be challenged and probably will dial down their activity.”

But a lot depends on what OPEC plans to do. At its June 5 meeting, the bloc reaffirmed its production commitments, but it may not be able to keep the taps open indefinitely.

Indeed, Jasper Lawler, a market analyst at CMC Markets UK, said in a report that OPEC may have to revisit its decision as early as this fall because low oil prices are taking a “huge bite out of the national revenues of oil-producing countries” even while forcing the competition to take a haircut as well. “Even if U.S. oil production does come down, until there are widespread defaults amongst U.S. firms, it is likely to be a gradual reduction,” he said. “U.S. dollar strength and a global growth slowdown especially in China both have the potential to weigh on the price of oil.” And that will hurt OPEC, but not as badly as it will Canadian energy producers.

This article was first published in the Financial Post magazine April 1, 2004.

The way Miles Nadal grew rich — even while his shareholders were suffering —made him a poster boy for everything bad about Canadian corporate governance. Now, just as bigger business celebrities are getting their comeuppance, Nadal says he’s changed. But is this man really the new face of the born-again boardroom — or is he just playing it to his own advantage?

Miles Nadal is in a good place. This morning, the chairman, CEO and founder of MDC Partners Inc. woke up at his Palm Beach pad, then got into his Range Rover and headed south on I-95. It’s the last Monday in January, and he’s just arrived in the tony Miami-area burg of Coconut Grove looking tanned and relaxed. The weather matches his company’s prospects: sunny and clear.

In fact, things have never looked better for the 46-year-old entrepreneur. In the past two and a half years he’s overseen a solid turnaround, and is on the cusp, as he puts it, of building a world-class advertising business. He’s spun off a couple of non-core operations at bonanza prices, thanks to the income-trust boom. His company has paid back $700 million in debt, has $100 million in cash, and shareholders have reason to smile: MDC stock has quadrupled since last spring.

Nadal is sitting in the offices of the hottest advertising agency in the U.S., Crispin Porter + Bogusky, which four days earlier won Burger King’s US$350-million-per-year account. MDC owns 49% of CPB, and in another three days, will buy 60% of possibly the second-hottest agency in the U.S., New York-based kirshenbaum bond + partners. Madison Avenue has taken notice, and Forbes will soon publish a profile on the Toronto-born Nadal entitled, “Who Is This Guy?”

“For the first time in MDC’s evolution, we have a very clear vision of who we are, what we want to be when we grow up, and how we’re going to get there,” Nadal says. “And that was not true before. We were in too many businesses, had too many serial entrepreneurial tendencies, and were criticized for being too deal-oriented. We haven’t bought anything in three years. We have focussed on minding the store. We’ve had an extraordinary turnaround in our balance sheet. I mean, it’s one of the great turnarounds, I think, in Canadian history.”

Modest, he’s not. But contrary to appearances, Nadal is a man on the defensive like never before. As I talk to him in the agency office, CEOs of all stripes are under attack. What started with the Enron meltdown in late 2001 is now reaching a crescendo. Conrad Black is under siege and about to have his escape plan thwarted by a Delaware court. The Ontario Securities Commission is investigating Biovail Corp. and Royal Group Technologies Ltd., both targets of governance critics. In just over a month, Disney boss Michael Eisner will be publicly humiliated and forced to surrender his chairman’s job, while WorldCom’s Bernie Ebbers will do the perp walk.

Whether by choice or by force, public companies are falling in line with the new realities of corporate governance — primarily by ensuring independent, outside directors guarantee the interests of all shareholders, not just those of management or controlling shareholders. Because of the deeds of a few bad apples, CEOs everywhere are being stripped of power and influence. It’s a new era in ethics, of Sarbanes-Oxley and Eliot Spitzer.

What does all this have to do with Miles Nadal? Beyond Bay Street’s inner circle, he may not be a household name. But people who follow the Canadian financial markets closely know him all too well. To them, he’s more than just the self-promoting, smooth-talking, wheeler-dealer with a track record for overpromising and underdelivering: He’s one of the bad boys of Canadian corporate governance.

Nadal has led his company on a wild adventure of acquisitions, divestitures and abrupt strategic shifts — all reflected in the company’s uneven financial performance. MDC shares last spring were worth less than their value when they were listed on the Toronto Stock Exchange in October 1987. Large Canadian investors — including the Ontario Teachers’ Pension Plan, which once owned more than 10% of its subordinate voting shares — have all but abandoned the stock.

But in the executive suite, rewards have been consistently distributed like candy. The company liberally handed out loans to Nadal and other executives, many of them interest-free and even fully forgivable. Nadal also received millions of options in the company and its subsidiaries. He’s currently paid an annual retainer of $950,000 and millions more for all kinds of fees and expenses. That makes him better paid than some bank presidents and heads of advertising companies more than 20 times the size of MDC.

The company had other hallmarks of poor governance. In the past, related directors, including his ex-father-in-law, have populated key board committees. The company had a dual-class share structure, giving Nadal almost half the votes despite owning just one-fifth of the equity. Nadal was both chairman and chief executive — a bugbear for critics who argue the roles should be split — and directors who didn’t like it his way were told to get lost.

Meanwhile, Nadal cut a private deal four years ago that only came to light in March after Canadian securities regulators instituted a landmark change to insider-trading rules. Before the change, insiders in public companies could make a variety of complicated derivative-based deals that allowed them put money in their pockets while disposing of the economic risk of owning their securities — without telling anybody. In a simple example, an insider could agree to sell his shares in five years at a set price — but receive the cash now. Meanwhile, for the length of that term, the insider would keep the voting rights on those shares and they would appear next to his name in the proxy circular as if all the potential risk and reward were still his.

Such deals were especially popular at tech firms, but even executives at large companies like Bombardier Inc. and Biovail Corp. took advantage. Last year, as the number and scope of these deals became more widely known, regulators decided the transactions should be disclosed to give all shareholders more insight into the financial dealings of the people who run their companies. Nadal filed notice of his deal on March 9, the deadline for disclosure. What MDC investors then learned was that two months before the stock-market bubble burst in 2000, Nadal, acting through a private holding company, borrowed $35 million against more than 80% of his MDC shares, along with other securities. If the value of the pledged securities fell below the value of the loan, Nadal could stick the lender — CIBC Capital Partners — with the securities. With that, MDC’s largest shareholder was protected from any risk of the portfolio, including those MDC shares, falling below $35 million in value. Nadal hedged his bet on his own company — something other investors never knew.

In sum, it’s easy to see why many have criticized MDC as a company where the boss has been richly rewarded, regardless of performance or how regular shareholders fared. “Miles is about making money,” says Sprott Securities Inc. analyst David McFadgen, one of few analysts who cover MDC.

But the times are changing. Public companies with spotty governance records are getting with the program. And MDC is right there among them: Related parties on MDC board committees? They’re now gone. Loans to MDC executives and directors? No more. Nadal’s compensation? It’s now subject to meeting performance measures. “I don’t think there’s another company that has better governance than we do today,” Nadal proclaims.

The biggest change of all: A month after our interview in Coconut Grove, Nadal will announce he’s converting his multiple voting shares into regular common stock — without any extra compensation — thus reducing his voting stake. This is the kind of change investors love to see. It’s a real sacrifice: relinquishing control and influence over the company he built. In the six trading sessions after the move is announced, MDC stock will rise 15%.

But take a closer look. MDC’s governance still leaves something to be desired, and Nadal has a long way to go before investors forget his track record. And just what is behind all these changes anyway? Is Miles Nadal his shareholders’ new best friend? Or is embracing the hallowed principles of good governance just the corporate world’s latest get-rich scheme?

Miles Nadal bursts into Chuck Porter’s dark, cramped burrow of an office, and offers the chairman of his star ad agency a high five.

“I have to pay homage — he’s the guru of the industry,” Nadal says.

Nadal is wearing a dark jacket and blue shirt, with the collar open to reveal a white T-shirt. He’s pudgy, personable, enthusiastic and youthful (the tan and seven hair transplants might have something to do with it), and he comes across more like the junior assistant to an important person — engaged and ready to pounce — than a stately and emotionless CEO.

Porter has a dry, self-consciously sarcastic sense of humour that probably makes him an enfant terrible at social gatherings. While waiting for Nadal, I’ve been getting to know the 58-year-old Minneapolis native, and it’s apparent he loves to shock. “We don’t promote pornography, we just create it,” Porter says at one point. Asked about Nadal’s management skills, Porter says, “I don’t know if he’s a good manager. He certainly doesn’t manage me.”

Porter is exactly the sort of maverick you’d expect to find at the senior ranks of an advertising agency that’s winning clients and rave reviews by pitching itself as the anti-agency. His bullshit detector is set on maximum at all times. But he’s no match for Nadal’s charm offensive.

“I can’t believe they pay me to do this, I’m having too much fun,” Nadal says, and for a second, you believe he’s on a break with the other management trainees. Porter is all smiles and ribs his sort-of boss, but Nadal is easy-going, self-effacing and takes every remark with an effortless smile.

But make no mistake — Nadal lives like a high-powered CEO, all the way. When he isn’t driving the Range Rover, he’s piloting his Aston Martin DB7 convertible. Or he might be on his 80-foot Lazzara yacht, a Robb Report special named Dare to Dream. His company is based out of an ornately decorated brownstone in Toronto’s Yorkville district. He used to live in Forest Hill, but recently moved to a penthouse condo in Paradise Island in the Bahamas — where the average temperature in January is 21 C and the tax rate is zero. He also has that place in celebrity-infested Palm Beach, a “humble little home” with only four bedrooms, as he describes it. He’s given millions to charity and his name towers over the newly renovated — and renamed — Miles Nadal Jewish Community Centre at the corner of Spadina Ave. and Bloor St. in Toronto. Every year for their birthdays, he buys his two daughters one share each in Berkshire Hathaway Inc. — the company controlled by his hero, Warren Buffett. The shares currently trade around US$90,000, which means his kids are both millionaires.

There’s nothing wrong with making lots of money or spending it. But few wealthy CEOs have done as well as Nadal for so long while their companies and shareholders failed to enjoy the same benefits.

Nadal promised great things when he took MDC public in a reverse takeover of a dormant mining company in late 1986, and listed it on the Toronto Stock Exchange less than a year later. He attracted the elite of Toronto’s Jewish entrepreneurial class to his board, including father-in-law Lloyd Fogler, a high-powered lawyer. By then Nadal was a small-time success story with bravado to spare. His company had $6.5 million in revenues after growing from a single photo shop to a mini empire specializing in a range of marketing services for corporate clients. His attitude was Big Time all the way: The 28-year-old already owned a 23-foot cabin cruiser named Tenacity, and slick company press kits featured glossy photos of the young arriviste who had left his lower-middle-class upbringing far behind. “My business life is a fairy-tale Fantasyland,” he told one interviewer at that time. “I’ve got the hunger and drive that my age brings — the eye of the tiger — and I dwell on that to keep the eagerness that made the company.”

Looking at his track record since going public, however, it seems Nadal may have been better suited to running a private business, where he didn’t have public shareholders to answer to. In the Before Enron era, model companies were focussed and stable, showed steady growth in revenues and profits and had reasonably compensated management. That, in a nutshell, is everything MDC wasn’t.

From the outset, as Nadal himself admits, its growth pattern was impulsive and erratic. Nadal seemed to grab whatever opportunities passed before him, building his company with a steady flow of acquisitions that favoured undervalued assets. “He looks at everything as a cash-flow opportunity, regardless of what kind of business it is,” says one analyst who used to cover the company.

MDC started out buying marketing, design and communications companies. Then, in 1993, Nadal bought the assets of a bankrupt stamp maker. The move paid off when it won a $170-million contract to supply the U.S. Postal Service soon after, but it still meant Nadal owned a stamp company. The next year, he launched a hostile takeover for Regal Greetings and Gifts Inc., a public company specializing in catalogue sales that had just bought a seed company from the Manitoba government. In 1996, he bought Davis+Henderson Ltd. (D+H), a cheque-printing business owned by Rogers Communications Inc. Nobody else wanted it, and he paid $50 million. The acquisition began to look smart when his two competitors exited the market shortly thereafter. Nadal went in yet another direction in 1999, linking up with Royal Bank of Canada to fund an incubator for technology start-ups.

“We’re not the same business we were three or four years ago,” Nadal once declared. “We’re not the same business we were 12 months ago. This is a company in a constant state of evolution.”

Shareholders also got used to going back to the drawing board. MDC stock could double or triple over short periods, but would inevitably fall back again, a testament to its choppy earnings performance. Until early last year, it was a long-term dud: In its first 15 years as a TSX-listed company, through October 2002, the stock averaged an annual return of 0.85%. According to its latest results, the company’s retained earnings — the total amount it has earned through the end of 2003 — are negative US$21 million.

Nadal’s compensation suffered no equivalent setbacks. Technically, he’s not an MDC employee. Instead, he’s paid through a management-services agreement with his related personal holding companies, Nadal Financial Corp. and Amadeus Capital Corp. That deal provides a retainer, plus compensation for personal, advisory and financial services. Such agreements exist at a handful of other Canadian companies and have seldom been popular with investors. In fact, Ron Besse, a former member of Nadal’s own compensation committee says, “I wouldn’t sit on a board again where that was a situation … unless there is full and total disclosure of the inter-company charges — and there wasn’t [at MDC].”

The year Nadal bought the stamp company is a good place to start counting. In 1993, MDC earned $1.9 million in net income on gross revenue of $44 million. The company showed big profit and revenue growth over the previous year, thanks to acquisitions, but earnings per share were flat at 4 cents. For that, Nadal earned a $260,000 retainer and received 1.1 million stock options. He also got another $600,000 in “special fees” related to “negotiations and advice” he provided the company relating to two modest financings.

In 1995, MDC’s earnings and share price were in decline, but Nadal’s salary rose 18%, to $325,000 and his “other annual compensation” increased by 13% to $565,891. Two years later, the stock had another bad year and MDC lost money, yet Nadal’s retainer jumped $50,000 over the previous year, this time to $500,000. His “other compensation” was $1.06 million and he got 250,000 stock options.

As the economy overheated, so did Nadal’s deal making — and his pay. MDC made 24 full or part acquisitions from January 1, 1998, to the end of 2000 for $444 million, racking up $369 million in long-term debt. MDC spun out its advertising and marketing companies — its foundation — into a separate public company called Maxxcom Inc., which it still controlled. (Maxxcom went on to make 13 acquisitions of its own, before falling on hard times during the advertising industry’s sharp downturn during the U.S. recession.)

By 2000, Nadal was earning a $650,000 retainer from MDC and a further $300,000 for his work as chairman of Maxxcom. Meanwhile, his “other compensation” that year topped $4.3 million. And while he received only 8,500 options in MDC, he received millions more in three of its subsidiaries, including Maxxcom. Shortly afterward, Veritas Investment Research, an independent Toronto firm with a strong shareholder allegiance, fingered MDC in a report as a company “worthy of focus based solely upon the generous salaries and management fees extended to senior officers and directors, as well as extensive option granting, large insider loans (generally interest-free and unsecured) and related party transactions.”

Veritas also wrote that MDC’s debt and acquisition binge had put it at risk of a setback. The setback came hard in 2001, when the bottom fell out of the advertising market. MDC’s long-term debt climbed to almost $700 million in 2001 and the stock crashed to under $2 — down from a high of more than $24 just 19 months earlier. The banks circled, and Nadal was forced to restructure and shrink the company. That led to big write-offs and a $153-million ($9.20-per-share) loss for the year — wiping out not just the earnings growth of the previous three years, but MDC’s entire history of retained earnings.

Later that same year, however, MDC also caught a break. Just two years after deciding to spin off the advertising business and focus on “security printing” (cheques, stamps and smart cards), Nadal did an about-face. MDC clearly needed cash and the cheque business looked like a gold mine, as post-crash investors fell in love with stable, cash-rich companies that faced little or no competition. At the urging of his friend David Kassie, then the head of CIBC World Markets, Nadal packaged off an initial 45% of MDC’s stake in D+H as an income trust. Because of the way trusts are valued, MDC got nearly twice the return it would have from selling it outright or doing a conventional offering.

In determining criteria for Nadal’s pay that year, MDC’s compensation committee paid more attention to Nadal’s fast action on asset sales than it did on the losses and debt-crisis that precipitated it. He received his yearly retainer of $950,000, plus “other annual compensation” of $2.5 million and long-term incentives worth $1.25 million — for total compensation of $4.7 million. In MDC’s management proxy circular, the committee said it “specifically noted the following in evaluating his performance”: that Nadal sold off 45% of D+H, sold Regal, implemented a cost-savings plan, renegotiated the credit facility and reduced long-term debt.

In the year or so that followed, Nadal sold off MDC’s U.S. cheque operation as a trust and also sold the remaining chunk of D+H. With the windfall proceeds, MDC paid off most of its debts and last year bought back the shares of Maxxcom it did not own for $1.85 each — 17% of its IPO value three years earlier. That’s another sore point with investors: buying back, at fire-sale prices, a company you recently spun off. Nadal just chalks it up as a shrewd move, after predicting two years ago ad spending would start to go up again.

While his healthy compensation has continued unabated, Nadal says he’s a changed CEO. He promises he’ll never overburden MDC with debt again. He’s focussed, and now talks about building his business into one of the top 10 advertising companies in the world. In 2004, he expects it will make US$35 million in operating earnings on revenues of US$280 million. MDC is 24 years old, and after its up and down ride, Nadal has this to offer: “It takes 25 years to build a great company. I think we have something to prove. You haven’t seen our best days.”

In the before Enron era, company directors weren’t expected to ask a lot of questions, especially if their CEO had started the company, was young, bright, confident and held the largest voting stake. And sitting across from Nadal in the agency boardroom in January, one can see how his directors would have been easily swayed. The loose and kibitzing Nadal from Porter’s office is no more: He comes across as shrewd, confident and serious, talking in complete, exquisitely enunciated paragraphs. “I’m highly numerate, I understand deal making, I understand the capital markets very well, and I know how to create a sense of urgency to capitalize on opportunity in a controlled way to get things done that most people are not possibly as effective as I am at,” he says.

Whatever he had, MDC’s directors loved it, despite the company’s disappointing record through the 1990s. “I was quite enthralled by Miles,” says Alliance Atlantis Communications Corp. CFO W. Judson Martin, a director and CFO of MDC from 1995 to 1997. “He’s a fun individual. Gregarious is the word. High energy, quick mind. A consummate entrepreneur. Never stops working. Never stops thinking.”

Another insider says, “Things get done for Miles. He accomplishes things many would not. He persists and persists. He gets what he wants. He really is MDC.”

However, the disparity between Nadal’s generous compensation and the company’s performance in 2001 was a turning point. That same year, a handful of directors began to raise flags about Nadal’s pay. Besse, one of the first outside directors to join MDC after its IPO and a long-time member of the compensation committee, became increasingly uncomfortable with the compensation. “Miles really ran the business for Miles,” Besse says. “I never felt we had good clear goals for Miles. I felt the measurement of his worth to the company was not well documented.”

Nadal was particularly close to one of the compensation committee members: Stephen Pustil, a land developer whom Nadal had met through his father-in-law several years before. The two were directors at Toronto’s Mount Sinai Hospital and Pustil was one of Nadal’s closest friends, Besse says. Pustil defended Nadal’s interests well on the committee, insiders say. Nadal describes Pustil as “a good friend. … I would trust him with my life.” Pustil was also entrusted with the roles of chairman of the compensation, nominating and corporate governance committees, and was a member of the audit committee. Pustil isn’t on any committees any more; in 2001, he “assumed additional responsibilities in the affairs of the corporation,” became classified as a “related director,” according to securities filings, and is vice-chairman of the board.

Besse’s departure was less graceful. After raising concerns, he was dumped from the compensation committee in early 2002 and from the board a few months later. He was happy to leave: “I didn’t want to be part of that,” he says.

But Nadal’s most vocal opponent around the board table was Graham Savage, a former chief financial officer of Rogers Communications who became a director in 1997 after he negotiated the sale of D+H to MDC.

Savage was most incensed about another privilege the board had repeatedly granted to Nadal: huge loans with generous terms. As of last spring, Nadal and his holding company, Nadal Financial, owed MDC $13.7 million. Most of those loans are interest-free. Nadal was supposed to pay 7% on $3.5 million of the amount outstanding a year ago, except the company waived the interest fee — as it did every year. The imputed interest showed up in his compensation, and it added up to $1.4 million over the last three years. (In all, more than a dozen other executives also got loans.)

Waiving interest is one thing. By virtue of a board agreement in 2000, Nadal will also receive a $10-million bonus to repay outstanding loans if MDC shares reach $30 “for a specified period.” There is no time limit.

All those loose loan terms cost shareholders. In 2000 and 2001, the company recorded over $15 million in provisions against the loans.

Sources say Savage made noises at the board table, demanding Nadal repay his loans, or at least be given a fixed term. “The independent directors, except for Graham, wouldn’t stand up and be counted,” says one insider. Things came to a head in the spring of 2002. Savage wanted real improvements to the company’s governance and said he wouldn’t stick around if they weren’t implemented. By summer, he was gone. Nadal says Savage’s departure was based on the company’s objective “to rotate the board to bring in people with greater experience in media and advertising.” Savage, who declines comment, went on to fry bigger fish: He’s on the independent committee at Hollinger International Inc. investigating Lord Black.

Nadal, understandably, doesn’t like a lot of questions about his pay and governance. “I just want to keep this about me and the company,” he says during a phone conversation following our meeting in Florida. He doesn’t want to talk about “all this other stuff.”

But the other “stuff” includes two other important areas of interest.

The first is Nadal’s substantial side interest in a private business called First International Asset Management Inc. (FIAMI) where, even away from the glare of running a public company, Nadal has recently run into concerns about his high pay.

Nadal started FIAMI seven years ago with the intention of buying up parts of small wealth-management firms across Canada and rolling them up into a larger company. Operating as FIAMI’s chairman, in tandem with president and CEO Michael Simonetta, he brought in investors such as CIBC, Goldman Sachs and Borealis Capital and snapped up various stakes in a handful of firms using more than $200 million in debt and equity. As with MDC, Nadal had a rich management-services contract with FIAMI that paid him hundreds of thousands of dollars per year in fees. Those funds continued to flow to one of his private holding companies even as Nadal took a more passive role when “things didn’t progress as he had hoped,” says one insider. “It was generous compensation for what he was doing in the latter years, and there was increasing animosity about the contract as time went on and performance lagged estimates.”

With FIAMI groaning under its debts, other shareholders and management took action earlier this year. Some of Nadal’s associates, including Pustil and Fogler, departed the FIAMI board. Nadal, who now owns 30% of the company, was demoted to director — and his contract was terminated. “The only comment I’ll give you on First is, I’m proud of what we’ve accomplished,” he says.

Nadal is even less forthcoming when asked about the second important bit of “stuff” — that complicated transaction in 2000 in which he hedged his bet on MDC stock and other holdings in return for a $35-million loan.

Nadal proudly points to the fact that when MDC stock was hovering around $2 in the fall of 2001, he bought 1.3 million subordinate voting shares in the open market. “We put our money where our mouth is,” he says. However, thanks to the new disclosure rules, Nadal has now also revealed that a year and a half earlier, when MDC was trading around $19 and piling on debt via ill-fated expansion, he pledged 88% of his MDC stock along with other investments — with a combined value of more than $100 million — as security in a complicated loan arrangement. The loan, with a 15% interest rate, is due in 2005.

Other than an eight-line paragraph filed with regulators, the transaction’s details remain private. But one line in the filing is the key to recognizing why this deal is contentious and had to be reported under the new insider-trading guidelines — namely, that the lender’s “recourse” on the loan is limited to the pledged shares. What that means is that even if the pledged shares collapse in value, Nadal needn’t pay anything more to complete the deal. All shareholders need to understand is that this means the transaction reduced the economic risk to Nadal of owning MDC shares.

At MDC’s current share price, the point might seem moot. But it was a different story when, within 20 months of the deal, MDC stock lost 90% of its value. In an absolute worst-case scenario, a total collapse in the value of those stocks (and the other pledged securities) would see Nadal walk away with the $35 million while MDC shareholders would be left with nothing. Such a prospect is the reason regulators now demand disclosure of such transactions.

Nadal’s re-investment in MDC stock when it was at rock bottom also looks less heroic considering he bought his shares between the time MDC filed its preliminary prospectus for D+H and when it filed its final prospectus. That means he bought the shares as MDC was out marketing the income fund, but before the investing public knew what kind of handsome proceeds D+H would bring in. The divestiture proved a key event in MDC’s turnaround, and within weeks most of the shares he bought were worth double what he’d paid.

“So what else would you like to ask me?” Nadal says curtly in reply to repeated questions about his loan deal. When asked about its apparent high interest costs, Nadal says: “I pay for capital in proportion to its value to me, and the opportunity costs of what I can do with the capital. Whatever I paid for [it], it’s small in relation to … how I have deployed the capital.”

As for the payoff, Nadal says he’s more than doubled his $35 million, after costs. He won’t say how he used the money, with the exception of the $3.2 million with which he bought those 1.3 million MDC shares in 2001. At mid-March levels, they alone are worth more than $27 million. “I’m glad I did the [loan] deal,” says Nadal. “The return for me has been spectacular.”

As governance mania sweeps the continent, MDC is falling in line. According to Nadal, one of his “more exciting moments” was announcing in February that he was turning his multiple voting shares into subordinate voting stock, reducing his voting control to 20% from 45%. “It was something people did not expect me to do, and that was uncharacteristic of their perception of me,” he says.

All members of MDC’s audit, compensation and governance committees have to be independent directors. The company has stopped giving out loans to its executives, and in fact, any bonuses they receive will have to be applied to pay back outstanding loans. Nadal has already repaid $3.9 million of his loans since last year, and now owes the company only $9.8 million.

Nadal, for his part, “has certainly been very receptive” to the changes, says Dick Hylland, chairman of the compensation committee. In fact, it was Nadal who led the decision to convert to a single class of shares, he says. “Everybody recognized it was time to do that. It was a substantially shareholder-oriented step” — albeit, something other companies with dual-class share structures had also done in recent months.

But there are still remnants of the old MDC. When its proxy is released in mid-April, it will show Nadal received 813,000 “stock appreciation rights” in 2003, valued at $5 and $9.71 apiece. After the stock’s recent run, they’re already worth more than $10 million; plus, unlike options, Nadal will pay nothing to MDC to exercise them. Nadal is also keeping his management-services contract and he continues to hold the titles of chairman and CEO. Lots of companies are splitting those roles, or at least appointing a lead independent director. “The notion of a lead director is something we will contemplate over the next 12 to 18 months,” is all Nadal says. And while other executives are being asked to pay back their loans, Nadal still faces the rosy prospect of a $10-million bonus with which to repay his, provided the stock hits $30. If anything, it’s arguable the governance changes are little more than window dressing. They certainly provide good cover if, as some suspect, Nadal is getting ready to cash out.

Last December, Miles Nadal attended the grand opening of the Miles Nadal Jewish Community Centre (JCC) in Toronto. It was an emotional event, and he shed tears at the ceremony. This was the place where Nadal got his start as an entrepreneur when he was 12 years old.

Nadal grew up in a wealthy neighbourhood, but his family didn’t have much. While his schoolmates were far away at summer camps in the woods, Nadal was downtown at the JCC day camp, where his fees were subsidized. “He grew up with a lot of wealthy, spoiled kids, of which he was neither,” says Michael Nisker, a childhood friend. That year, Nadal borrowed his uncle’s Instamatic camera and took it to day camp. He became the official camp photographer, and was soon doing the same thing for the Toronto Toros and Argonauts sports teams. He never looked back; according to his high school yearbook, Nadal’s “Famous Quote” was, “It is better to be a Big Fish in a small pond than a small fish in a Big Pond.”

If Nadal started out as an underdog, so did the JCC fundraiser. But in the end, the campaign raised $12 million. Nadal brought in about two-thirds of the money himself, including a $2.1-million personal donation. Some people mutter how the big sign with his name in lights is tacky and self-congratulatory, but Nadal — who has given away millions more to a variety of causes — says, “You should never judge why people do the right thing. You should just encourage them to do so.”

But even though he’s conquered the small pond of Toronto, Nadal himself has moved on to a different environment. That condo in the Bahamas isn’t just a winter home; he’s taken up permanent residency in the tax haven, though he claims his prime motivation is that he likes warm weather. “Do I miss minus-19 in the middle of winter? Not much,” he says.

Whatever the reason, it raises the question, what’s next for Nadal and MDC?

Thanks to Crispin Porter + Bogusky’s success, MDC is positioning itself as the company to which creative, entrepreneurial advertising people can sell out without “selling out,” a buyer that will take a hands-off approach in the running of the business. The purchase in January of 60% of the kirshenbaum bond + partners agency, which has the Target account, is a prime example. Just about every advertising giant in the world has tried to buy it over its 17-year life, but co-founder Richard Kirshenbaum says he and his partner “didn’t want to be a charm in somebody’s charm bracelet. Miles and his team want to invest in our brand. I know they will live up to their word.”

Nadal says, “All of a sudden MDC has what I call credibility by association” with Chuck Porter and his gang. He’s joined their world, and is ready to declare war on industry giants such as Omnicom Group and Interpublic. “We are the anti-network network,” Nadal proclaims. He figures he can spend US$50 million to US$75 million per year buying up like-minded agencies.

But Nadal is also enjoying the credibility that comes with making a few changes to satisfy governance sticklers. Converting to a single class of shares has done wonders for the stock price. It’s also a ticket to wider attention in the U.S. MDC can now be a U.S. domestic issuer of stock and begin reporting in accordance with U.S. Generally Accepted Accounting Principles — which means more U.S. institutions will now be allowed to invest for the first time.

Best of all for Nadal, having a single class of shares makes MDC a far more appealing takeover target. And despite his declaration of independence, Nadal’s MDC of 2004 looks very much like a roll-up play positioning itself to be taken out by a larger outfit. “He’ll probably sell [MDC] to somebody,” says one associate. “Ultimately, that’s usually the end game of smaller public companies in a consolidating industry.”

“My end game,” Nadal responds, “is to build a great business, an institution with energy that’s not dependent upon my style or ability. And as to where that ultimately goes, who knows? But if we build a great business, the opportunities to ultimately maximize that value will be numerous.”

God bless good governance. Thanks to a few timely sacrifices, Nadal could be laughing all the way to the Bahamas.

]]>http://business.financialpost.com/financial-post-magazine/let-the-sun-shine-in/feed0stdmiles-nadalTop 20 tips for investors, whether you are a newbie or an old handhttp://business.financialpost.com/financial-post-magazine/top-20-tips-for-investors-whether-you-are-a-newbie-or-an-old-hand
http://business.financialpost.com/financial-post-magazine/top-20-tips-for-investors-whether-you-are-a-newbie-or-an-old-hand#commentsTue, 05 May 2015 10:18:05 +0000http://business.financialpost.com/?p=543666

Planning to retire early or well? Or maybe you just want some extra money to spend now. In either case, chances are that you will need to stash some of your hard-earned salary into some investments other than just your house. But markets are skittish and can be scary, so here are some strategies and advice to keep you motivated to invest.

The quickest way to grow your money — aside from an unexpected windfall — is to invest what you already have. It’s also the quickest way to lose it all if you’re not careful. That’s one reason why there are so many rules and investing oracles, though only one of Omaha. Following the ups and downs of the market and the swings of market commentators can all be a bit exciting, but it shouldn’t be.

Much like the standard 60/40 split between stocks and bonds, which, by the way, doesn’t work for everyone all of the time, investing should be a bit boring.

The hot stock, the hot IPO, the hot bought deal, all probably best left alone, especially if they take off without you. It’s better to sit on the sidelines than chase returns. “Markets can remain irrational longer than you can remain solvent,” Pelletier says. “The four most dangerous words in investing are: This time it’s different. People often praise investors who have a good run or fire managers after a bad run. They are, on average, wrong on both decisions.

Or, as Jonathan Rivard, a financial advisor at Edward Jones in Richmond Hill, Ont., puts it, “follow your goals, not the herd.” One exception to that rule, says Peter Hodson, CEO of 5i Research Inc. in Toronto, is to buy a company when it declares its first-ever dividend. The company will likely raise the dividend in the future, but even if it doesn’t, it will still attract yield seekers, which should keep the stock buoyant. A dividend will also help you stay in the stock when temporary macro-economic conditions force the price down as panicked investors flee for safer ground. As Pelletier notes: “More money has been lost trying to anticipate and protect from corrections than actually lost in them.”

But much of investing is pretty pedantic and requires investors to focus on the details of both the fundamentals and how they invest. For example, investors should hold long-term investments in either a discount brokerage account or a transaction-based full-service account so that they don’t incur fees while they wait, says David Kaufman, president of Westcourt Capital Corp., a Toronto-based portfolio manager specializing in traditional and alternative asset classes and investment strategies. But investors who trade frequently on their own research, especially in small-cap companies, should use discount accounts with fixed trading commissions. “Full-service brokers still charge on a per-share basis, meaning that it’s twice as expensive to buy $10,000 of Apple the day after a split than it was to buy $10,000 of Apple one day prior, which is crazy but true,” he says. “Fixed-fee discount accounts don’t care about the number of shares, just the number of transactions.”

No matter what kind of advisor — if any — investors decide to have, they should feel comfortable that they are getting the best advice at the right price. That will become easier when new regulations governing what advisers must disclose to their clients — including all fees and actual returns — start going into effect in July.

The rules, called Client Relationship Model – 2 and mandated by the Canadian Securities Administrators, have been known for a while, which has given advisors plenty of time to prepare their systems accordingly. That’s also given them a lot of time to churn up their client portfolios in the weeks and months leading up to the implementation of CRM-2. Most advisors, of course, won’t do anything untoward, but investors might want to beware any excessive buying and selling in their accounts until summer. Forewarned is forearmed.

QUICK TUTORIAL
Need some quick investing tips to get started? Jonathan Rivard, a financial adviser at Edward Jones, has three simple ones to consider.{Take advantage of dollar cost averaging} Financial markets regularly move up and down, but investing on a regular schedule can pay off in the long run.{Stay calm} History teaches us the importance of staying invested in good times and bad — and, if appropriate, adding good investments to your portfolio when prices are down.{Travel abroad} Well-diversified portfolios include international equities. Why buy the best in Canada when you could benefit from the best in the world? But pay attention to increased risks.

FUNDS
The benefits of exchange-traded funds are fairly apparent: increased liquidity, greater transparency and lower costs than mutual funds and they allow investors to become almost instantly diversified. But that only addresses the structure of this investment and, as shown by the slow progress ETFs are making in Canada compared to the U.S., investors need a bit more prodding. Tyler Mordy, president and co-chief investment officer at Toronto-based HAHN Investment Stewards & Company Inc., shares his top five reasons to try ETFs.

Broader diversification
Given the increasing vulnerability of capital markets to global events and conditions — credit developments, changing government and monetary policies, and global macro imbalances — a broader ability to diversify portfolios is now desirable.

An answer to a low-return environment
In many cases, real returns from traditional bonds no longer provide reasonable value or necessary return prospects. ETFs can access income opportunities from around the world.

Global opportunities
It is impossible not to be a global investor (even when only pursuing low-risk fixed income through domestic markets). Economic and financial factors are more inter-connected than ever before, so a greater international focus allows better risk management as well as a wider range of opportunities.

Risk diversification
Investors often like to believe they had the correct outlook for a certain sector or investment class, but individual company risk produced a poor outcome. ETFs help mitigate this risk.

Death. A sweet release? Hardly, at least for your family and associates, especially if you didn’t leave explicit instructions on how to divide up your estate and that includes your collection of Elvis curios. Antiques? Maybe in your eyes. Memorabilia? Again, maybe. But using such terms doesn’t hold sway with a judge if one of your heirs decides to challenge your wishes.

“Never use words like antiques, memorabilia, my stuff, in your will because they are not definable,” says Les Kotzer, a Thornhill, Ont.-based wills lawyer and author of four books including The Wills Lawyer. “I had a guy come in who had a homemade will that said ‘I leave everything to my best friends and my favourite relatives.’ I said, ‘What the hell, who are these people?’”

Jillian Bryan, portfolio manager and investment adviser at TD Wealth, says it’s also important to remember that changes in marital status, the birth or death of a family member, or a change in financial situation or employment status are factors that could require you to update your estate plan.

Related

Words matter “One word can destroy your family,” says wills lawyer Les Kotzer, which is why being unspecific tops his list of pet peeves about people who make wills — you do have one, right?

Don’t assume goodwill “Never assume your children will work it out, because it may be their lawyers who have to work it out,” Kotzer says. “Often, the kids want to work it out, but their spouses may not let them work it out. You have third parties involved.” Sorry, mom and dad, you have to plan now.

Be fair… “Don’t favour one over the other. Create neutrality,” Kotzer says. If you can’t decide who should get what, draw lots, flip a coin, but don’t leave it up to the kids to fight it out.

…But not always Don’t create false expectations in your children’s minds. “If you as a parent want the home that you’re living in to go to a caregiving child since she’s given up her life for you, don’t leave it in the pot and think your other kids will give it to her,” Kotzer says. Telling your kids now may create some bitterness, but at least your wishes will hopefully be respected.

Don’t be an ostrich “It’s not always the money people fight about; sometimes they fight about the memories,” Kotzer says. “You can’t divide a painting on the wall and you can’t split a table in the hall. Somebody is going to get it.”

Ring up your marriage “Marriage revokes your will. If you get married in Ontario, you no longer have a valid will. Separation does not revoke your will,” Kotzer says. “There are rings in marriage: the engagement ring, the wedding ring and the suffering. ”

Beware of sin Common-law partners are not entitled to an automatic inheritance, Kotzer says, so make sure you include your common-law spouse in the will (if you want to).

Give up some power Make sure you have an executor of your will and someone who has power of attorney, says TD’s Jillian Bryan. If you’re sick, who’s going to deal with your finances? Who is going to make medical decisions for you? “A proper estate plan isn’t just about what will happen when you pass away,” she says. “It’s also important to plan for the unexpected.”

You’re never too young “I have young kids making wills. People who are 20. You know why? They inherited fortunes from their grandparents and if they die, they want certain people to get it,” Kotzer says. “If you die without a will, the law writes the will for you and the law says I don’t care about your favourite charity, I don’t care about your best friend, I don’t care if you don’t speak with one brother, he gets the same as your other brother if you don’t have parents.”

Your federal, provincial and local governments have a deal for you this tax season. It’s called paying extra tax. In some bizarre world, it seems some taxpayers are more than willing to pay just a little bit more to help balance the budget and slay the deficit.

If you look closely at your tax return or property tax, you’ll notice the option to volunteer. If you’re smart, you’ll throw it out because most of us have probably paid enough. Tax freedom day — the day when the average Canadian starts working for himself/herself — occurs on June 9. Why extend yourself into the summer?

My City of Toronto tax bill came with the incentive of allowing me to direct my money to 11 specific departments or to general revenues. Amazingly, for the fiscal year 2013, the last for which there are records, 8,000 people made donations totalling $1.09 million. Some even come from other parts of the province and country. Toronto says about 60% of the donations were for $25 or less and 5,763 of them went to animal services — when it comes to saving pets, it obviously feels less like a tax.

Related

If you donate money to the federal government, you’ll probably get a nice letter from the receiver general thanking you for your efforts. Former Public Works Minister Rona Ambrose said in a 2012 interview that she’d written a couple of those. Maybe it was because the government is in deficit, but donations sent in to tackle the debt hit a record $11.2 million in 2010-2011.

Jamie Golombek, managing director of tax and estate planning at Canadian Imperial Bank of Commerce, points out you should at least get a charitable receipt for your troubles. Canadians can claim a tax credit based on the eligible amount of gifts to the Government of Canada, a province or a territory. These gifts do not include contributions to political parties and the amount that qualifies for the tax credit is limited to 75% of your net income.

There’s also something called the Ontario Opportunities Fund that allows you to redirect your tax refund to pay down the province’s debt. Imagine being allowed to chip in a little extra to pay for those gas plants no one seems to want. By the way, Ontario is not interested in anything less than $2. That’s chump change when it comes to the province’s debt problems.

Does Golombek actually know anybody who has ever voluntarily kicked in a little extra in tax? “No,” he says, in a polite email. Me neither. And I won’t be starting this tax year.

]]>http://business.financialpost.com/financial-post-magazine/why-you-should-ignore-governments-that-want-to-voluntarily-pay-extra-taxes/feed0stdcashIt’s OK to take money from your RSP before you retire, plus other tips on how to set up your leisure yearshttp://business.financialpost.com/financial-post-magazine/9-strategies-to-get-you-started-on-a-life-of-leisure
http://business.financialpost.com/financial-post-magazine/9-strategies-to-get-you-started-on-a-life-of-leisure#commentsWed, 15 Apr 2015 10:54:56 +0000http://business.financialpost.com/?p=541694

There’s no shortage of contradictory advice and studies when it comes to retirement planning. Depending on whom you talk to, we’re collectively saving too little, or perhaps too much, or just enough to make sure we live our final years in the manner we have become accustomed to or want.

Chances are, with Canada’s pension and old age benefits, you won’t starve from a lack of funds. But if you’ve always been poor, sorry, you will be in retirement, too, unless you’re getting a nice inheritance. If you’re rich, you’ll probably be okay in retirement, too. It’s the rest of us that worry about the future to point of obsession. About half of us even lie to family and friends about our retirement plan, says a BDO Canada Ltd. survey, and 52% of Canadians under the age of 30, when retirement planning should be well underway, don’t have an idea of how much they will need to save, according to a survey by Tangerine.

The good news is that 77% of retired Canadians are living the lifestyle they envisioned, Tangerine reports, and 90% of them were able to retire at the age they planned, with more than two-thirds of them finishing work between 55 and 64. The bad news is that only 34% of current workers expect to retire when they are that age and one in five expect to work into their 70s.

Unfortunately, even adding a corporate pension to your government retirement benefits may not be enough, says Crystal Wong, senior regional manager at TD Wealth Financial Planning, which is why it’s important to start saving early and have a diverse portfolio of investments.
Below is a primer from Wong to get you started on a life of leisure.

Pay yourself first

One easy way to build savings is to set up an automatic transfer of a set amount each month into a savings account. Setting aside money on a regular basis — whether it’s $20 a day, a week or every paycheque — adds up in the long term, particularly when those savings earn compound interest.

Regularly contribute to an RSP

Setting up a series of regular payments into an RSP is one of the easiest ways to save money for the future and likely reduces your tax obligations since you’ll presumably be making less money in your golden years. Yet, nearly half of Canadians don’t contribute to an RSP and more than a third of those who do, wait until the annual deadline to make a lump payment. Contributing smaller amounts throughout the year won’t have a significant impact on your lifestyle and you’ll avoid a last-minute scramble to come up with a lump sum at the end of the year.

Get a TFSA

A Tax-Free Savings Account helps build savings faster because the investment income or growth earned in them is not taxed. The current maximum annual contribution is $5,500, but any unused contribution room can be carried forward.

Turn tax returns into ongoing returns

Around 70% of Canadians expect to get a tax return this year and many of them plan to save at least part of it in an RSP, TFSA or other savings account. An easy way to boost retirement funds is to consider increasing the amount of the refund saved, as well as saving any bonuses or monetary gifts received during the year.

Get a head start

With just over a week left before you have to file, unless you are owed money or want to pay potential penalties, it’s a good time to start thinking about strategies for 2015 and beyond. For example, if you wait until just before the deadline and make one lump-sum payment, you’re missing out on the potential for compound interest throughout the year. This amount may not seem significant, but it adds up over time.

Set up a budget

Apart from helping you understand how much money is coming in and going out, a budget can help identify opportunities to increase savings to help achieve financial goals.

Savings. Have any? If not, the tips below will help you get some. Don’t kid yourself, it won’t be easy. The temptation of having a little extra cash on hand can be too much for many, causing them to splurge on a fancy dinner or a DJ turntable to impress the kids. Don’t become a hoarder with your money, but, as with most things, moderation is the key.

Canadians lie. A lot. Especially about money. A BDO Canada Ltd. survey found that more than half of us lie about our financial situation, with 36% saying they do so because they want to protect their loved ones from worrying. We lie about our credit cards and monthly expenses, how much we’re saving for our children’s education, whether we have enough for a vacation, entertainment expenses and, of course, our retirement plan. The biggest liars? The middle-aged. Almost 55% of those aged between 35 and 54 years old lie about their finances and they are the ones with the most earning potential, the biggest debts and the most happening in their lives.

All that lying will likely mean bad news down the road. “The fastest-growing statistic in insolvency is seniors having either a bankruptcy or proposal,” says Doug Jones, BDO trustee in bankruptcy.

Granted, most of these lies are likely small ones, maybe even white ones, but they can add up over time and that’s what worries Jones. “All of the assumptions about how much you need in retirement are always based on a paid-for home and no debt, and that is not the reality of the world any more.”

Of course, there’s still time, which is why it’s important to not let past mistakes haunt you, says Edward Jones advisor Jonathan Rivard. That means breaking the habit of amassing credit-card debt, “especially if you’re in the even-more-terrifying habit of recycling credit” by paying off a credit card with a different credit card or line of credit. You can quickly ratchet up your debt if you’re not keeping a lid on all your various debt lines. After all, it’s pretty hard to save up if you’re forever paying something off.

But keep in mind that not all debt is created equally. “In some situations, it’s perfectly reasonable good debt to have and it’s at a good interest rate to have it,” says Tracy McLennan, a wealth advisor at CIBC Wealth Advisory Services. “Paying down your debt is just another way of achieving your goals so that I have a net worth and a capital base to achieve those things that I want.”
Read on for 20 more tips on how to boost your savings.

The Goal

Ignore the Joneses
Always keep in mind that what might be right for one person may not be right for your family, CIBC’s Tracy McLennan says, especially as you go through different life stages. Prioritize your goals. Most people would like to do all sorts of things, but we have limited resources, whether that’s time or financial, so you have to prioritize what you want to do first, McLennan says. That could be buying a house, saving for your children’s education, planning for retirement — quite possibly, all three and even more.

Make a plan It’s important to understand your goals and how you’re going to get there even if an advisor is making a plan for you. “If I go to my GP, I don’t necessarily have to go to med school to get a good understanding of what a particular ailment is and what I need to do to correct it,” McLennan says.

Don’t hibernate Many Canadians often don’t read or really understand their financial statements, says Jonathan Rivard at Edward Jones. If you don’t understand them, ask an adviser for help and always ensure you receive copies of your statements. You may be paying unnecessary fees.

The Details

It’s tough to save money. Everything we buy is for a reason and we often convince ourselves that it’s a necessary expense that can’t be eliminated or compromised. But there are ways to cut costs or at least become aware of your spending habits so that you can make some changes, either now or in the future. Here are six easy steps to take.

Track your expenses Tracking what you buy and how much you spend is even more important today because we often don’t carry cash in our wallets, write cheques or balance a chequebook any more. Put your expenses into a spreadsheet or use an online expense tracker that banks and accounting software makers provide. You don’t have to do it forever. “As long as you have a good understanding, you don’t have to do it on a daily or weekly basis,” says CIBC’s Tracey McLennan.

Say yes to cash Don’t want to keep track of your habits? Switch to cash. “Take out a sum of money at the beginning of each week and promise yourself that will be your only spending money,” says Jonathan Rivard at Edward Jones.

Will yourself to save If you have extra cash, resist the urge to spend it on a night out or shopping. “Even a couple of hundred dollars can go a long way once it’s invested,” Rivard says.

Cut a vice Maybe that pint after work with the lads or quick smoke with the ladies outside at lunch is a necessary stress-relieving break, but maybe it’s just an expensive habit that needs to be broken. A few cigarettes per day can set you back $520 a year. A pack a day costs $3,650.

Little things add up We all have regular bills to pay that can’t be tinkered with too much: mortgage payments, property taxes, car loans and the like. But you can make a difference in other ways. For example, commit to making at least one meal at home. Having breakfast and coffee at home saves at least $5 a day, even more if you’re buying from Starbucks. That easily adds up to more than $1,200 a year.

Check for no-fee banking options Many banks have options to switch to no-fee bank account, which may mean a few less conveniences, but it’s an easy switch to save and could result in saving an additional $10-$15 a month.

Real Estate

The Oracle of Omaha Warren Buffet recently advised his heirs to switch to passive investing vehicles to preserve the wealth he has built up from the shares of Berkshire Hathaway Inc. since 1965. “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund,” he said in a letter to shareholders. Other millionaires, leery of the moderate returns this strategy will inevitably bring, believe in real estate. More than a quarter of the high-net-worth investors who make up the Tiger 21 peer-to-peer network say real estate will the best sector to put money into over the next five years. Richard Crenian, founder and president of Toronto-based real estate asset manager ReDev Properties Ltd., says property ownership is a good diversifer from the stock and bond markets and it can be bought more easily using leverage. Here are five other reasons real estate is a good place to build up your net worth.

Income Generation After building and other expenses are paid, any remaining cash from the tenants’ rent is passed on to owners and investors, which may provide a source of stable, supplemental income.Wealth Preservation High-net-worth investors’ primary goal is often wealth preservation as opposed to growth. “Commercial property is one of the best investments to achieve wealth preservation because it is a long-term investment,” Crenian says.

Inflation protection Real estate, like everything else, has its ups and downs, but Crenian notes it is generally a lot slower to react than the stock market. You are unlikely to wake up and discover that your real estate investment is worth 10% or 20% less than yesterday.

Tax advantages Commercial rental property offers different tax advantages than residential property since you can deduct items such as a building, furniture or equipment. You can also entitled to a capital cost allowance deduction, which allows you to deduct the cost of the property over a period of several years.

Investor Control Unlike stocks and bonds, investors have some control over the value of real estate assets by either improving the property, decreasing costs or increasing rents and fees. “With stocks or any other investment, the investor can’t do anything to increase the value of the investment,” Crenian says.

Quick tutorial: Six steps to better financial planning

Being able to save is an essential part of financial planning. After all, money funds the plan, whether that’s in the short or long term, and whether you’re young or old, a single parent or in a blended family. The key, says Crystal Wong, senior regional manager at TD Wealth Financial Planning, is knowing where you want to go since that will determine which route you take.

1. Think about your goals and objectives. Knowing where you want to go is the foundation of a sound financial plan and will help you decide which route to take.

2. Gather the data. A successful financial plan starts with an assessment of where you are now and what financial resources you already have.

3. Do the analysis. This step will help you identify the right solutions for your particular journey.
A financial planner can assist in reviewing your specific situation and help you choose from the many options that are available.

4. Develop a strategy. This is your action plan of what is needed to achieve your financial goals. Working with a financial planner can help ensure the plan is realistic and achievable.

5. Put it into practice. A financial plan is only helpful if you put its recommendations into action.6. Follow up and review. Just as your life changes over time — a new job, a family, a home — your financial goals can change, too, so it’s important to regularly review your plan to make sure it stays relevant for your particular needs.

]]>http://business.financialpost.com/financial-post-magazine/top-20-tips-for-boosting-your-savings/feed1stdpiggy-bankWhy a vicious Saudi price war against North American oil producers is doomed to failhttp://business.financialpost.com/financial-post-magazine/why-a-vicious-saudi-price-war-against-north-american-oil-producers-is-doomed-to-fail
http://business.financialpost.com/financial-post-magazine/why-a-vicious-saudi-price-war-against-north-american-oil-producers-is-doomed-to-fail#commentsThu, 09 Apr 2015 19:10:28 +0000http://business.financialpost.com/?p=540310

Canada, the up-and-coming oil superpower, has long had a complex relationship with Saudi Arabia, the heavyweight of the Organization of the Petroleum Exporting Countries. In the early days of the commercial oilsands, the Saudis, with the world’s largest oil reserves, looked upon Canada, with the third-largest, as a high-cost nuisance. As oil prices increased, and Canada’s production grew, the Saudis encouraged it to become a member of its oil cartel. If Canada decides to join, “We say welcome,” Ali Al-Naimi, the Saudi oil minister, said in 2007.

Of course, Canada, with its market-based economy, didn’t. Instead, its innovation-driven oil production growth continued, and Canada pushed out Saudi Arabia as the main oil supplier to the United States. By 2011, the Saudis had lost their cool with Canada over an advertising campaign by EthicalOil.org, a tiny grassroots organization based in Toronto, that encouraged consumers to favour “ethical” oil from Canada over “conflict” oil from undemocratic regimes. The Saudis hired lawyers to suppress commercials and put pressure on Canadian oil companies to not support the campaign. Even so, investors and energy consumers, from Asia to Europe, continued to favour Canadian production as an alternative to oil from despotic regimes.

By last November, Canada and Saudi Arabia were at opposite ends of a price war. The Saudis led OPEC to keep production unchanged rather than cut excess supplies in the face of sluggish world economic growth. The goal was to protect Saudi Arabia’s oil market share from two growing threats: shale oil in the U.S. and the oilsands in Canada. OPEC’s forecasts showed production from the U.S. and Canada was headed for 20 million barrels a day by 2020, from 15.2 million barrels a day in 2013. North American unconventional supplies, driven by technological advances, were becoming the “primary driver of recent non-OPEC output growth,” the cartel said in its 2014 Outlook.

The Saudi strategy to quickly push prices to uneconomic levels was typical of what we have come to expect from the Middle East: brutal, uncompromising, shocking.

It’s been a painful price war.

A supply glut of about one to two million barrels of oil a day, on top of daily demand of about 91 million barrels around the world, has crushed oil prices by 60%. Hundreds of billions of dollars in value have been lost as energy consumers buy oil for less than it costs to replace it.

Investment in future projects has ground to a halt. Oil-dependent governments are struggling to balance the books. Thousands of previously hard-to-find skilled workers are out of work. In Canada’s oilsands, where operating costs are among the world’s highest, cash flows are expected to fall by $23 billion in 2015 and 2016 and peak volumes of four million barrels a day have been pushed back by four years to 2024, predicts Callan McMahon, principal analyst for oil consultancy Wood Mackenzie.

But it’s highly unlikely that the drilling innovations that are enabling production of unconventional oil reserves will be put on the shelf. Indeed, lower oil prices may even accelerate the drive to improve, making non-OPEC supplies harder to push around. “We are using this time to challenge the organization to find new ways to further reduce our already low operating, sustaining and maintenance costs, and also to look at how we can grow this business utilizing less capital and continue that growth during periods of low commodity prices,” said Bill McCaffrey, CEO and president of oilsands producer MEG Energy Corp.

OPEC is scheduled to meet again in early June to assess whether its policy shift has helped rebalance the market in its favour. It will be an appropriate time for self-assessment, too, particularly by the Saudis. This latest oil shock highlighted the harshness of their ways, and is one reason Canada’s oil will continue to be favoured at their expense.

Maybe it is Stephen Poloz’s good fortune to have arrived as Bank of Canada governor just in time to experience the unravelling of the global cult of central banking. Since at least the 2008 financial crisis, and perhaps even for a few decades before, central bankers have loomed over our economies as all-knowing and all-powerful oracles of wisdom. Just give them a little time and central bankers will deliver us from crisis and into growth and prosperity — or so they say.

It is still too early to unequivocally categorize Poloz, but there is some evidence he is less inclined to turn the BoC into an economic miracle worker. In the media and the market, he is simultaneously portrayed as a skillful downsizer of the bank’s role and a bumbling distributor of confusing messages. My money, so far, is on Poloz the anti-cultist, a central banker who is less willing to see the bank as master of the economy and more interested in sticking to the bits of economic knitting it can actually control over the long run — which is not much.

Poloz the anti-cultist

Milton Friedman, the Nobel-winning arch-enemy of the U.S. Federal Reserve, once joked that “money is too serious a matter to be left to the central bankers.” Money, however, is the only thing they can control, and inflation/deflation remains the only long-run economic trend they can really influence.

The modern cult of central banking may well have its origins in Paul Volcker, the head of the Fed who became the public symbol of America’s great war on inflation during the early 1980s. By raising interest rates to 20% and triggering a recession, Volcker’s Fed brought inflation down to 3% from 13% in a few years, a massive achievement.

Related

But the personalization of the Fed had begun. It continued later under Alan Greenspan, who transformed the Fed from inflation fighter into a putative back-room facilitator of growth and stability. U.S. economist Robert Lucas famously said in 2003 that macroeconomics’ “central problem of depression prevention has been solved, for all practical purposes.” Stable moderate growth would never end.

Or so it seemed until it ended in 2008 in a crisis that handed even more power and mystique to central bankers. Not only would they lift the world economy out of crisis, rescue the financial system and create a new wave of growth, they would also help enact new policies and regulatory regimes to put investment bankers in their place and curb financial excesses.

Now, after seven years under the cult of central banking, through experiments with massive asset purchases (quantitative easing) and near-zero interest rates, growth remains sluggish to non-existent. The last gasp of the cult may well be the European Central Bank’s new round of quantitative easing, which is a continuation of what former Fed Chairman Ben Bernanke, in a 2012 lecture, called “the great convergence,” in which major central bankers adopted policies similar to the Fed’s.

The success of these policies is far from obvious and even further from certainty. Many believe there will come a time when the world realizes that central bank powers over the long run can be dangerously deployed and should be limited to getting inflation right and not much else.

Robert Lucas may have proclaimed that the central problem of macroeconomics has been solved, but he also went on to talk about other policies — aside from low inflation — that would deliver major economic gains and growth over the long term: reduced taxes on capital income, reduced tax rates on employment, flat tax rates and reduced government spending. If Poloz as anti-cultist can steer Canadians away from their focus on the Bank of Canada as the manipulative savior of the economy and toward all the other policies that would do much more to spur growth and prosperity, so much the better.

No one likes taxes, except for the few people who voluntarily pay more than they should to help out cash-strapped governments. But they are a necessity since someone has to pay for the services that we all enjoy or complain about. That said, there’s no reason we shouldn’t use every available deduction and tax credit and that means filing a return even if you don’t have to pay taxes. We’re looking specifically at you, students with little or no income, especially if your parents are using your tuition tax credit, which can be worth up to $5,000 per child. But if you worked at all, filing a return starts building up room in your RSP, something that might come in handy later on, much later on granted.

For the rest of us working stiffs, the most important thing to keep track of are changes. “Things often get missed when there’s change, either in the tax department or in your family’s life,” says Caroline Battista, a senior tax analyst at H&R Block in Canada. For example, for the 2014 tax year, the government has introduced a family tax cut, an enhanced Universal Child Care Benefit and doubled the Children’s Fitness Credit to $1,000 per child. An H&R Block survey found that only 15% thought the new tax changes would impact their returns, but, for example, just 36% of Canadians were even aware of the improved fitness credit.

You may also have got married or divorced, had a child, taken on an aging parent as a dependent, moved, changed jobs — all of which may impact the amount of money you owe or, hopefully, get back from the government.

The Basics

➭ File a return. This seems obvious, but low-income earners, those who don’t make enough to pay taxes, often skip this step. But it makes sense to file since you might qualify for the GST credit.

➭ A good tax return should end with the number zero. “It’s not meant to bankrupt you in April and it’s not meant to be a huge savings,” H&R Block’s Caroline Battista says. If you aren’t zeroing out, revisit your federal and provincial/territorial TD1 forms that are filed with your employer. Perhaps something has changed in your life that isn’t reflected on those forms and your employer is taking off too much or too little for tax purposes.

➭ Be especially careful with TD1 forms if you have several jobs as not enough tax may be withheld in total. If, for example, you make $10,000 at five different jobs, none of the employers will withhold any tax, but at tax time you’ve earned a total of $50,000 and that is more than enough to pay taxes on. Battista says this often arises with subcontractors and workers in professional offices such as dental hygienists and secretaries who work part time for different bosses.

➭ Declare all your income. “It’s an honest declaration of your worldwide income,” Battista says. People have been known to skirt the issue if they profit from selling on sites such as eBay or from blogging.

Your Life

➭ One mistake people often make is claiming employment expenses when they shouldn’t. “The Canada Employment Amount covers a lot of things and everyone is entitled to that,” H&R Block’s Caroline Battista says, pointing out the credit covers expenses such as home computers, uniforms and supplies for work. If that doesn’t cover everything, get a T2200 form signed by your employer that says what you’re required to have for work and keep any receipts for six years.

➭ Need a car for work? Keep a detailed travel log that shows where you went and how far it was. The burden of proof lies on the individual, not the CRA.

➭ If you’re claiming moving expenses because of work, you can claim transportation, storage and travel costs, but also temporary living expenses for accommodations and meals for up to a maximum of 15 days. You can also claim up to $5,000 for interest, property taxes, insurance premiums and heating and utilities required to maintain your old residence while you attempt to sell it after it has been vacated.

➭ The disability tax credit is often left unused, but Battista says it covers conditions someone might not consider a disability. For example, children who have ADD, anxiety disorders, epilepsy, among others, may be eligible.

➭ One misconception, Battista says, is that couples can file joint tax returns in Canada. “Everyone is still an individual. You bring your returns together to maximize your credits and deductions and then in the end, you pull them apart again.”

Your Children

➭ A tuition credit of up to $5,000 per child can be transferred to a parent, but the student must file so that Canada Revenue Agency can reconcile its accounts. Students should file anyway to get the GST credit.

➭ Interest on student loans can be claimed, but only if it is a government loan.

➭ Income from a Registered Education Savings Plan must be claimed as income. The principal payments are safe since they came from after-tax savings, but any growth in the plan counts as income and must be claimed.

➭ The Children’s Fitness Tax Credit is now up to $1,000 per child. The fees must have been paid during 2014, which is important to remember for programs that continue past December 31 and have staggered payments.

➭ The Enhanced Universal Child Care Benefit applies to children older than six, but under 19. Though this is not claimed as part of the return, parents have to fill out RC66 to apply.

➭ Public transit passes for your children — or your spouse/common-law partner — can be claimed if you aren’t already using that credit.

Your Money

➭ Taking money out of your RRSP early? Battista says many people don’t withhold enough money for taxes since they mistakenly assume they won’t make enough money to have to pay taxes or that the money is tax free. The same goes for employment insurance and maternity leave benefits. They all count as income.

➭ Interest on a loan taken out for investment purposes can be deducted, but not if it’s for an RRSP.

➭ The popularity of pension income splitting means spousal RSPs are often forgotten. “But if you’re hoping to retire early and plan to pull the money out before the age you’re allowed to pension income split, it is good tax planning to think about a spousal RSP,” Battista says.

➭ Borrowing to buy an RSP to enhance your return only makes sense if you plan to pay it back in a short time period, especially if you already have credit-card or other high-interest debts.

The top 5 things people miss when filing their return

Jamie Golombek spends a big chunk of life watching for tax-related changes and cases as managing director, Tax & Estate Planning, at CIBC. Here are his top five things people often miss when filing their returns.

1. Claim a non-refundable credit for interest on your government student loan.

Canada’s top capital market regulator is apparently a toothless tiger no more. Recent data released by the Ontario Securities Commission revealed the country’s largest provincial securities watchdog “commenced an increased number” of criminal and quasi-criminal proceedings in the courts last year, successfully secured jail terms for a couple of miscreants and collected more money from folks who violated securities laws, all the while strengthening its alliances with other police services. Now it’s in the process of combining forces with the RCMP under one roof.

So impressive was this track record that OSC chair Howard Wetston was hauled out to unveil them publicly. Finally, it seemed, the much-maligned (some of it unfair) commission had the statistical chops to show it really was a serious force.

But upon closer examination of the commission’s record, all the high fives may be premature. By almost every measure, enforcement activity actually declined last year — in some cases by significant amounts. Overall, the OSC commenced a total of 22 proceedings, compared to 27 in 2013. Of the total number of cases the OSC opened and closed against individuals and companies, the numbers dropped a whopping 53% to 91 from 170 in 2013. Four of these cases wound up before the courts: two under provincial securities laws as quasi-criminal, and two prosecuted under the Criminal Code. The remaining 87 were handled through hearings before an OSC tribunal. Compare that to 2013 when 166 were handled at the commission.

Even settlement agreements, the regulator’s preferred tool of enforcement, were down year over year. In 2014, the total number of negotiated settlement agreements decreased to 29 from 95 in 2013. And the much-feared U.S.-style no-contest deals failed to materialize in droves as only two were secured against four companies involving about $21.5 million. Meanwhile, cease-trade orders were down to 67 in 2014 from 159 in 2013, and the number of cases where protective sanctions (these include measures such as registration restrictions, director bans and cease-trade orders) were imposed fell by more than half to 210 from 425 in 2013.

On the bright side, the OSC managed to improve on collecting fines and penalties, topping $73 million, 26% more than the $58.1 million collected in 2013.

Related

The numbers only tell half the story, conceded Wetston. Policing has become increasingly complex, he explained. Fair enough and the regulator should be applauded for doubling down on the gritty cases that involve fraud and other criminal behaviour where the evidentiary threshold is much higher than in cases that are heard before a commission tribunal. Still, that doesn’t explain why settlements are on the wane. They are cost effective, preserve precious resources for high-profile cases and still help ring up successes that allow the regulator to buff its image. The U.S. Securities and Exchange Commission has built a fearsome international image doing just that. To wit, the OSC didn’t handle one stock manipulation case in all of 2014.

Presumably, when the OSC and the RCMP’s 28-person Integrated Market Enforcement Team (IMET) begin co-habiting this month, Canadian securities enforcement will finally get the kind of cooperation that U.S. law enforcement has afforded the SEC. IMET prosecutes criminal capital market offenses of national importance while the OSC regulates Ontario’s capital market but isn’t mandated to pursue criminal offenses. Under the arrangement, the RCMP will give the OSC access to resources it otherwise wouldn’t have, most notably search warrants. For its part, the OSC, which has long lent staff to help the police on white-collar cases, will now be able to quarterback the RCMP on complex cases. Unfortunately, neither boasts a stellar record heading into this arrangement. But rather than dwell on the past, let’s hope this partnership lives up to its enormous potential.

]]>http://business.financialpost.com/financial-post-magazine/the-osc-is-bragging-about-its-enforcement-record-but-theres-less-than-meets-the-eye/feed0stdoscThis young couple can ‘have it all’ – but it will take some jugglinghttp://business.financialpost.com/financial-post-magazine/this-young-couple-can-have-it-all-but-it-will-take-some-juggling
http://business.financialpost.com/financial-post-magazine/this-young-couple-can-have-it-all-but-it-will-take-some-juggling#commentsTue, 07 Apr 2015 15:50:21 +0000http://business.financialpost.com/?p=539396

Far from the crowds of downtown Toronto, Bill and Toni Jaines,* both 32, face the usual challenges of young families. On a monthly net income of $8,800, they have to pay down their mortgage, provide money for their children’s post-secondary education and build up a retirement fund. The couple has been married for five years and decided last year to buy a house and start a family. Their first child was born last year and another is due soon. “We want to live within our means, have as much opportunity as possible for our children and to save for our retirement,” Bill says.

Financial planning, however, is complicated by the nature of Bill and Toni’s income. Bill makes $94,800 a year before tax as an engineering consultant for a company that does not match either pension or RRSP contributions. Toni, a human resources coordinator, works for a company that provides a defined-benefit pension, but her present gross income of $50,400 a year will not generate a pension sufficient for the couple’s retirement. Juggling income and their budget is going to be essential.

“They can have it all, but only if they plan how they manage the stages of their lives” says Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C. “Debt reduction has to come first, then they can invest in their childrens’ educations and in their retirement. Frugal spending leaves a substantial monthly surplus for savings. Moreover, time is on their side. They are taking an active interest in their financial futures. Most people wait until it is late. Or too late.”

The couple’s biggest debt is their $358,000 mortgage with 23.5 years to go until it is paid off at a current monthly rate of $1,675. The mortgage has a present interest rate of 2.89% and should be paid off by the time they are 56. But if interest rates rise to 5%, as they eventually will, Moran estimates the Jaines will either have to cough up a third more money each month or extend their amortization by up to seven years. Such an increase may prove problematic since there will be increasing pressure on the family’s income as the kids grow up.

Toni makes $3,400 a month after tax when she is working, but she will only receive $1,960 a month in maternity benefits from February to July this year, after which she will return to full-time employment. Bill brings home $5,400 a month after tax. They save about $1,150 when both are working and they have plenty of RRSP space to put that into since Bill currently contributes just $300 a month even though his annual limit is $17,000 and he has collected $124,000 of available RRSP space. If Bill puts $1,500 more each month into the RRSP account, he would accumulate $18,000 a year on top of the present balance of $20,000. His tax refund would be about 30% or $5,400, which could go to their mortgage debt, shortening the amortization length to 17.5 years and saving about $42,000 of interest, Moran estimates.

The problem, of course, is to find or generate that extra money for RRSP investment and perhaps a Tax-Free Savings Account. One option is to use the house to generate the money by renting out the basement (see investment advisor below). If they can find the money, their RRSP would build up to $800,000 just before Bill turns 60, assuming steady growth at 3% after inflation. If they spend this RRSP balance over 30 years until they are 90, it would provide an annual pre-tax income of $39,600 in 2015 dollars.

But they also have to contribute to their childrens’ RESP. They have already invested $4,000 in their six-month-old child’s RESP and their annual contribution limit will double to $5,000 when their second child is born. If they contribute the maximum for the next 17 years, adding $1,000 in CESG bonuses, and get a 3% return after inflation, the fund will have $141,000, enough for tuition and books for two four-year university educations if the kids live at home.

Related

Once the Jaines’ children move out, and assuming they have paid off their home, their monthly spending of $8,700 would be halved to $3,900 a month. Their expenses can be covered if they play their cards right. If Bill and Toni work to age 60, but postpone taking CPP until age 65, then at 60 they would have Toni’s defined-benefit pension of $25,200 (25 years times 2% of final five years’ wage) and Bill’s $39,600 annual RRSP payout for a total pre-tax income of $64,800. If income is split, they would have $4,750 a month to spend after 12% average income tax.

At 65, each could add Canada Pension Plan benefits of an estimated $11,214 for a total income of $87,228 before tax. With splits of eligible pension and investment income, they would have $6,250 to spend each month after 14% average income tax. At 67, each could begin Old Age Security and receive, using present rates, $6,765 a year, making total income $100,758 before tax. After paying 16% average income tax on eligible pension and investment income, they would have about $7,050 a month to spend. There would be a substantial surplus for travel, helping their children or charitable donations.

]]>http://business.financialpost.com/financial-post-magazine/this-young-couple-can-have-it-all-but-it-will-take-some-juggling/feed0stdcoupleDavid Rosenberg reveals his most important investing lesson: A little history can go a long wayhttp://business.financialpost.com/financial-post-magazine/david-rosenberg-reveals-his-most-important-investing-lesson-a-little-history-can-go-a-long-way
http://business.financialpost.com/financial-post-magazine/david-rosenberg-reveals-his-most-important-investing-lesson-a-little-history-can-go-a-long-way#commentsTue, 07 Apr 2015 15:09:08 +0000http://business.financialpost.com/?p=539393

I started my career as a Bay Street economist on Oct. 19, 1987 — Black Monday, the very day of the crash. A 23% slide in one single day, building on a downtrend that had been in place since the end of August. That was my first day as the financial markets economist at the Bank of Nova Scotia.

I had just finished a three-year stint as a housing economist at Canada Mortgage and Housing Corp. As I wandered through the trading floor — the first time I had ever seen a trading floor — I am sure I would have grabbed a return bus ticket back to my cushy civil service job in the nation’s capital had it been offered.

As it turned out, I followed the chief economist (Bill Mackness) and assistant chief economist (Warren Jestin, who is the chief today, and a long-time mentor) around all day as they met with the bank’s senior brass and, boy, were they cool cucumbers (then again, they had no P&L).

Amid the pandemonium, they kept their heads as many others lost theirs, and showed chart after chart to support their view that we had a liquidity event on our hands, not a fundamental event, and that the dust would settle within weeks into a great buying opportunity.

And they say economists can’t call the markets.

Related

At that time, practically everyone had a recession forecast and fear dominated. Greed went on a vacation. I lived through New Century, Bear Stearns, Lehman and AIG when I was toiling for Merrill Lynch in 2008, but I can tell you the fear was equally palpable in 1987. We had negative technicals. An overheated stock market. Excess enthusiasm. The U.S. Federal Reserve was not just tapering but tightening. Currency instability was in the G7, not emerging markets. Even the movies — Wall Street then, The Wolf of Wall Street now — were similar.

But real GDP growth was running at a 6% annual rate. Earnings growth topped 50% and revenues were running north of 10%. The fundamentals were great, but valuations, technicals and sentiment conspired to cause a huge correction. The fundamentals won out in the end. The market found a bottom in late 1987, and the recession and bear market didn’t rear their ugly heads for another three to four years.

A little history can go a long way.

My learning lesson was to ignore the refrain that it is “different this time.” Each cycle has its own peculiarities and unique characteristics, but there are many patterns that re-emerge time after time.

But if I was alone on a desert island, and some people probably wish I were, and I had one tool in the kit to use for predictive purposes, it would be the yield curve. Back in that antsy period in 1987, the one thing that did not happen was that the yield curve did not invert (as it did in 2007). It remained steep and, as such, provided the signal that the expansion and bull market had more years to run (three to be exact).

David Rosenberg is chief economist and strategist at Gluskin Sheff + Associates Inc. and author of the daily economic report, Breakfast with Dave. Follow David and his colleagues on Twitter @GluskinSheffInc

In B.C.’s lower mainland, the Landarms (not their real names) — Warren, 37, and Betty, 35 — are betting that real estate will be the best investment they can make. The Landarms have two investment condos, one worth $250,000 and another worth $140,000, a $712,000 house and a belief that property will beat stocks and provide them with a pleasant income when they retire from their jobs as tech managers three decades from now.

To buy their house and two income properties, the Landarms cashed in $65,000 worth of stocks held in exchange-traded funds and their TFSAs, and added $50,000 cash for total down payments of $115,000. They have mortgages totaling $841,500 and pay $3,000 a month in principal and interest for their house and $1,526 for the condos. They also plunk down $4,100 a month on a $25,000 line of credit used to buy the rental properties. Those debt service charges, $8,626 a month, account for about 65% of their $13,286 total monthly income, which consists of their combined paycheques of $11,444 and rental income of $1,842. “Almost all of our wealth is in real estate,” Warren says. “We could diversify away from that, but we are also considering a small apartment building. We are conflicted.”

Warren and Betty are thinking of moving from active work in their careers as managers of wholesale merchandise companies into partial retirement in their mid-50s, then fully retire in their early 60s. They know rising interest rates could devastate their rental incomes and even reduce the value of their properties. They have to roll over their mortgages in 2019. By then, interest rates may have moved up by 1% or 2%. Of course, they can control their deficit by stretching amortization and lowering monthly payments. That would boost income, but delay equity.

Benoit Poliquin, chief investment officer of Exponent Investment Management Inc. in Ottawa, says the Landarms’ lack of diversification is a concern, but it is not a crisis to have a portfolio with a great deal of one asset class and little in others. After all, they can build up and diversify over time. Moreover, real estate has flexible accounting rules that permit investing in the cost base of rental properties and building up their balance sheets, then using rental income or nibbling at the capital value at will in retirement. Real estate investments can be seen as a start in building a family’s fortune. Eventually, there must be diversification into other assets, he says, which will give the couple more stability and certainty in their plans.

Real estate investments have unique characteristics as retirement vehicles. Unlike Registered Retirement Income Funds, which are required to pay out their value with specific minimums at various ages and with resulting tax exposure, there are no compulsory payout rates for rental properties or even for undeveloped land. Moreover, the properties are leveraged investments. A small amount of capital is on the rental properties, which have a present equity of $142,500 and generate gross rental income of $22,100 a year. That is a nominal 15.5% annual return before expenses.

Property taxes, interest and principal repayment, and maintenance costs reduce the gross return, but growing equity in the properties along with rental income can make the properties lucrative investments in time.

Given the way an owner’s equity in mortgaged property rises, it would be about 15 to 17 years before their monthly equity growth begins to outweigh the interest paid each month.

In the meantime, however, there is a severe deficit to make up, Poliquin says. Using the present balance of their rental property mortgages, $247,500, an additional 2.5% interest payment on today’s outstanding debt would add a third to their mortgage expense. They may be able to raise rents a few per cent a year, as B.C. rent controls allow, so the actual cost of higher interest rates might be just a few hundred dollars a month.

If interest rates double in the next five years, they would accompany improving business conditions. Stocks would likely thrive, dividends would rise, and freshly issued government and corporate bonds would pay higher interest. But housing prices could stagnate or fall, since higher interest rates would mean that people could afford less house.

If the rental properties, with a present market value of $390,000, gain a conservative 2% a year after inflation for the next 25 years, when the mortgages financed at current low rates will be fully paid, they would be worth $640,000 in 2014 dollars. If their rents, presently $1,842 a month in total, rise at the same rate, they would be $3,022 a month. The return on owner¹s equity, 100% of the fully paid property value, would have declined to just 1%.

But Warren and Betty would probably have rolled their appreciated capital into new investments. If leveraged in rental properties, they might get 5% or $32,000 a year on that future value. The future return, which is speculative, based on assumptions of how fast property values will rise, goes along with such risks as tenant damage or failure to pay rent and general risks like adverse neighbourhood change.

It is difficult to predict what incomes the Landarms may have in retirement. Their properties can eventually pay perhaps $3,000 a month with no mortgage cost. That would contribute $36,000 to income in a best-case scenario. Betty, who contributes to her company’s pension plan at a rate of $5,737 a year, which is matched by her employer, should have $550,000 in the plan when she’s 60. If paid out to exhaust all capital by her age 90, it would provide $27,250 a year. Both should be eligible for at least 64% of Canada Pension Plan benefits, $12,780 in 2015, should they retire and start CPP at 60. That works out to $16,360 for the couple. Thus their age 60 income would be $79,610 in 2015 dollars before tax.

At 67, each can get full Old Age Security benefits, currently $6,765 per person per year for permanent annual income of $92,840. If eligible pension and property incomes are split and the couple pays tax at 15%, they would have about $6,575 in 2015 dollars each month to spend. That’s far more than the $3,100 they now spend apart from paying off their mortgages and savings. There would be room for more travel and a comfortable way of life. Most of all, with diversified investments, they would have more stability and less worry in retirement.

]]>http://business.financialpost.com/financial-post-magazine/almost-all-our-wealth-is-in-real-estate-rising-interest-rates-could-devastate-retirement/feed0std0303houseAndrew Coyne: Deflation is the latest phantasm being used as an excuse to engineer policieshttp://business.financialpost.com/financial-post-magazine/andrew-coyne-deflation-is-the-latest-phantasm-being-used-as-an-excuse-to-engineer-policies
http://business.financialpost.com/financial-post-magazine/andrew-coyne-deflation-is-the-latest-phantasm-being-used-as-an-excuse-to-engineer-policies#commentsTue, 10 Feb 2015 18:42:43 +0000http://business.financialpost.com/?p=521020

Ever since the financial panic of 2008 nearly cratered the global economy, the world has been rocked by a series of policy panics.

First it was declared, scant days into the event, that monetary policy was of no use in such a crisis. We were, it was said, in a classic liquidity trap. To loosen money was of no more use than “pushing on a string.” Only fiscal policy could save us now. So the world’s leaders agreed to run large deficits, whose chief effect was… to increase the size of their deficits to such an alarming degree that most were soon forced to reverse course.

The second, related policy panic focused on interest rates. Notwithstanding the salutary effect of monetary, as opposed to fiscal, expansion in righting the world economy, that was waved off as a mere temporary emollient. Hadn’t interest rates been forced down to near zero? Hadn’t central banks, therefore, “run out of bullets”? Having reached the “zero lower bound,” what could they possibly do for an encore?

To which central banks replied with successive rounds of quantitative easing — direct purchases of government bonds and other securities — which proved a highly efficient means of injecting liquidity into the economy, despite the loss of the interest rate lever. Some have even been experimenting with negative interest rates; in effect, charging private banks to park their money with them. The zero lower bound turns out not to be as impermeable a barrier as it was depicted.

So to the latest policy panic, the strangest yet: the one concerned that inflation, the scourge of western economies in decades past, is now too low. (Sample headline: “Low Inflation Dogs Fed…”) The news is filled with cries of alarm that prices might even (shudder) fall, a phenomenon known as deflation.

Related

The first thing to be said about this is that we have seen brief periods of falling prices before, including in the recent past, without any calamity suddenly enveloping us. To have any impact, then, deflation, like inflation, has to be sustained over some period of time. And, like inflation, it has to be large enough that it affects people’s thinking about the economy, notably their expectations of the future path of prices.

Deflationistas are right to worry that should prices go into a sharp and sustained decline, they might take the economy with them, as people put off purchases in anticipation of still further price drops. But that’s highly unlikely: it doesn’t automatically follow that if prices ever drop even the slightest bit, they must inevitably fall into a death spiral.

Indeed, it would require quite spectacularly perverse monetary policy, of a type rarely seen (outside Japan) since the Great Depression. Just as inflation is “always and everywhere a monetary phenomenon,” so is deflation. It doesn’t visit us like some plague, but must be actively engineered by central banks. Deflation, then, is effectively the mirror of inflation: a little bit of either will not kill you, so long as it does not become a lot.

If I’m skeptical of this phantasm’s likelihood, it is in part because the people most concerned about it seem to be the same people who would like to see more than a little inflation, on the theory that this would somehow prove stimulative. I had thought this discredited by experience long ago — it requires, among other things, that people do not realize inflation is rising, or take action to insulate themselves from its effects — but there you are.

There is no more need to panic about deflation than any previous hobgoblin. Keep movements in prices within a percentage point or two of zero, on either side, and we’ll be fine.

John Nicola has built up a sizeable firm dedicated to mostly serving the needs of high-net-worth Canadians. In the past 20 years, Nicola Wealth Management has grown from a startup to one of the country’s bigger independent money managers with more than $3 billion in assets under management and over 100 employees in Vancouver, Kelowna and Richmond, B.C., and, as of 2014, Toronto. The target clients are business owners and professionals with investable assets of $1 million or more who need investing advice, but also a healthy heaping of financial planning that includes tax structures, insurance and retirement benefits.

By its very nature, Nicola plies his trade in a niche market, to be sure, and a high-end one that is mined by several other firms, including offshoots of the big banks, who have been known to sniff around independents such as Nicola from time to time. Nicola’s offering certainly doesn’t have mass appeal, given its target audience, although there’s no doubt the average Canadian needs quite a bit of the same advice that it dispenses to the 1%. But Nicola has now invested in a new offering that could appeal to the other 99% of investors, and perhaps even a chunk of his current wealthy clients to boot. It’s a robo-advisor called WealthBar Financial Services Inc. and it’s headed up by Tea and Christopher, his daughter-in-law and eldest son, respectively.

Somebody is going to make this really successful

“I didn’t just invest in Christopher and Tea because they’re related to me,” Nicola says. “I explained to them that I would have made an investment in any online advisory model as, quite frankly, a defensive decision with respect to the way Nicola Wealth Management runs itself and also because I think it’s going to be a very successful business. Somebody is going to make this really successful.”

Robo-advisors are the latest evolution of online financial advice services, and use software algorithms to assess investor risk profiles and then advise them about which investments — typically a group of exchange-traded funds that can include stocks, bonds, real estate, alternative, commodities, and even a little cash — to hold. Such services have blossomed in Canada during the past year, following a similar trend in the U.S. where companies such as Wealthfront, which has raised US$105 million in financing in the past year, and Betterment have made names for themselves. Even venerable Charles Schwab & Co. has announced a competing service called Intelligent Portfolios, which validates the concept at the very least and proves that the established wealth managers are paying attention.

Related

But WealthBar has a twist on the model since it also uses human advisors to help clients with more complex areas including insurance needs, how to best use tax-exempt accounts such as RRSPs, TFSAs and RESPs, and how much they should be saving to achieve their goals. “We separated what we offer into two sides that are connected,” Chris says. “One is the investment management side, which typically gets referred to as the robo-advisor side, which is that fund-of-ETFs approach, low-cost investment management. The other side is financial planning and Tea takes the lead on all of the financial planning.”

Chris’s statement is not particularly self-effacing. He’s an engineer by training, just like Tea, taking electrical engineering/applied math and mechanical engineering, respectively, at Queen’s University in Kingston, Ont. Chris even ended up with a master’s in applied math. Both ended up working in the technology industry, but both also worked on and off at Nicola Wealth Management. Chris started building software and systems to help solve some of the company’s internal efficiency issues, while Tea worked in various back-end administrative and processing functions. One notable summer project that they worked on together was converting all the company’s current and future paper files into searchable PDFs, a system that is still used today. “Real estate in Vancouver is quite expensive, so the project allowed Nicola to release quite a lot of real estate in the office and allowed for some expansion and new hires as a result,” Tea says.

But at the back of their minds was an idea to start a technology-focused firm that could offer many of the same services that Nicola Wealth Management offered, but with a different demographic in mind.

“This always came back to us starting in the early 2000s and spending time with my dad talking about their technology platform and how to move the advisor more online, move more of the relationship online, give the client more access to the information online,” Chris says. “Nicola Wealth wasn’t an option for most of our colleagues and friends, but we wanted to be able to offer the same types of investing strategies, the same types of financial advice, but targeted at that market.”

[Canadian investors] are like the frog in a pot of boiling water; they really need something to drag them out of there

The challenge, of course, is that much of the investment industry is based on face-to-face consultation and moving paper or spreadsheets around. “We realized we needed more automation, better reporting, better systems,” Chris says. “We started from scratch. We didn’t transfer over any IT or technology from Nicola. We started building it brand new. Technology changes so fast so there were huge advantages in us just getting everything done greenfield, as they say. But what we learned at Nicola was valuable.”

Oddly enough, John Nicola initially started in science as well. After winning a physics award in high school, he took physics/math at university, but it wasn’t for him. Nor did he see a future playing bass in a rock band that helped him pay the bills for a couple of years. But the band’s lead guitarist was instrumental in helping John start his financial career by urging him to join Metropolitan Life as a salesman. “I was 22, I was single, I had no debt, but no assets. I hated insurance… I didn’t know much about it, but I was pretty sure I hated it,” Nicola recalls. “But he said it’s $640 a month. That sounded pretty good back in 1974. I was 22, my manager was 19.”

He quickly left, however, after finding out he could only sell Metropolitan’s products and joined a brokerage. “I’ve only worked for an employer for one year of my 40 years,” John boasts. He joined Jim Rogers at Rogers Group Financial in 1984 and became president in 1989, before starting his own firm in 1994 with about $80 million in assets under management. The key to his success, however, was when he switched to a fee-only portfolio manager platform in 1999.

Nicola’s sweet spot is the high-net-worth space, but that’s not all he goes after. Among the firm’s 1,500 clients are about 400 “future profile” clients who are young professionals just starting their careers, so they are nowhere near $1 million in assets. The strategy seems to work since Nicola boasts that his firm has a 99% customer retention rate, no doubt solidified by their investment returns. Nicola estimates his average client will end up with a net return (that is, after fees) of 7.5-8%. Its worst year was 2008, when Nicola’s accounts were down an average of 6.5%, but that stacks up pretty well since the S&P 500 cratered by 38.5% and the TSX Composite dropped 35%.

We’re trying to marry all three pillars — insurance, investment and the planning

Most of Nicola’s 110 employees are client facing, with one-third of an advisor’s time spent on dispensing investing advice and the other two-thirds spent on financial planning items. A team of 15, including Nicola and chief investment officer Rob Edel, make decisions about the investment strategy, whether it’s equities, bonds, private equity, real estate or mortgage funds.

WealthBar is much leaner. It has just eight people on staff including portfolio manager Neville Joanes, who is a CFA and was chief compliance officer and a portfolio manager for a company recently acquired by Fiera Capital. Tea, meanwhile, is two exams away from becoming a chartered investment manager. “Between Neville’s experience and education and my starting to learn on the go, we make a pretty good team,” Tea says.

Like Nicola, WealthBar charges a flat percentage fee for its services. Clients with less than $5,000 to invest can even get a free professionally reviewed financial plan, access online planning tools and a TFSA starter account. For those with more than $5,000, WealthBar charges a sliding rate of 0.6% to 0.35% at the high end for clients with more than $500,000. At that level, investors get yearly financial plan reviews, online planning tools and a balanced ETF portfolio that is automatically rebalanced with all trading fees included, as well as services such as tax optimization, insurance needs analysis, tax loss harvesting, corporate tax planning and estate planning.

Of course, selling ETFs in Canada, even when offering extra financial services, is no easy task. The country’s mutual fund market is now well over $1 trillion, while ETFs were at a paltry $75 billion as of the end of November 2014. Nevertheless, Tea believes WealthBar can grow its assets under management to the tens of billions of dollars in the next five to 10 years. “We really feel we can go after a good sizeable chunk of the forgotten clients who are left, people who have been with the big companies and gone through advisor after advisor and they’re paying a lot of money and not being serviced,” she says.

There are at least three other robo-advisors in Canada: ShareOwner, which has offered a portfolio building service for several years and started a robo-offering last year, Nest Wealth and WealthSimple, whose CEO Michael Katchen told Financial Post Magazine that he believes he can grow the firm to $1 billion in assets within two years and $1 trillion in the next 10 years, an astounding growth rate. By comparison, John Nicola believes his HNW firm can grow at between 10-15% a year, which means its assets would double every five to seven years.

But robo-advisors face a number of hurdles, not the least of which is Canadian investor inertia. “They’re like the frog in a pot of boiling water; they really need something to drag them out of there,” John says. “Robo-advisors are going to have to go out and get the business. They’re going to have to sell and sell and sell. Get referrals. Do a lot of hard grinding work to get to a critical mass, after which, they will probably get viral and organic. But the startup phase is going to be really challenging.”

Another reason for the slower growth of robo-advisors in Canada than in the U.S. is the relatively slow adoption of exchange-traded funds, the bedrock of robo-advisor portfolios. Chris believes one of the reasons ETFs haven’t taken off in Canada is that investors are uncomfortable buying them on their own. “Canadians want an advisor and even though when they buy a mutual fund they aren’t getting in-depth financial advice with it, they feel like something happened there,” he says. To be fair, though the idea of ETFs is fairly simple, there is still an education process to be done, something that can go hand in hand with teaching investors about the robo-advisor model. WealthBar, for example, does seminars and lunch-and-learns with individual companies to get in front of people. “There’s still a need for a bit of face to face, especially at this stage, to make people aware of what we do,” Tea says.

After that, it’s going to come down to the different target markets, pricing models, strategies and services offered. “Our focus is definitely on holistic broad-based financial planning and services and trying to make that scaleable in Canada,” Tea says. “We’re increasing efficiency on the full-service model by an order of magnitude versus some of the other robo-advisors who might be a low-cost model fund of funds, just technology driven. We’re trying to marry all three pillars — insurance, investment and the planning — together so people can get help in the context of their lives.”

]]>http://business.financialpost.com/financial-post-magazine/make-way-for-the-robo-generation/feed0stdnicolasWhy auto sales are once again firing on all cylinders in Canadahttp://business.financialpost.com/financial-post-magazine/why-auto-sales-are-once-again-firing-on-all-cylinders-in-canada
http://business.financialpost.com/financial-post-magazine/why-auto-sales-are-once-again-firing-on-all-cylinders-in-canada#commentsWed, 04 Feb 2015 18:25:52 +0000http://business.financialpost.com/?p=519304

O wild Mustang, the best of autos past,Driven by VWs and BMWs that last and last,Yellow, and black, and pale, and hectic red,Self-driven multitudes around the worldare fleeting,O wild wild Mustang, thou breathof freedom’s being(Apologies to Percy Bysshe Shelley)

Another great auto industry sales wave is upon Canada, the latest in a rolling series of cyclical surges that have dominated the industry since the beginning of the auto age. To call something a tsunami is a cliché, but look at the graph below. Veteran Canadian industry watcher Dennis DesRosiers has seen it all before, and he estimates the current boom in new car sales could roll through to 2020.

As early as 2017, new car sales in Canada will likely reach two million. Looking at the trend line, that mark is likely to be topped even sooner. At that level, Canadian new vehicle sales will have risen 37% since the crash of 2008 and the bailout of General Motors Co. and Chrysler Group LLC. Worldwide, annual auto sales topped 70 million in 2014, with strong new growth expected to come from China and other developing countries.

The major auto show season — Detroit, Montreal, Toronto, Chicago — is in full swing. No industry on earth trumps the automakers as a symbol of global capitalism. Quality and technology have exponentially improved, emissions are a fraction of what they used to be, competition is fierce, new products are released at record rates and are more popular than ever. This is happening as if in deliberate defiance of all who continue to wage war on the industry. Through traffic congestion, climate policymakers, nationalist government meddling and subsidies, parking restrictions, road tolls, bike lanes, public transit expansion and emissions regulations, the auto industry keeps on driving. Governments pretend to ride herd over the world’s major automakers and consumers, but consumers rule in the end — which is as it should be.

Car buyers care not about the nationality of the automaker or the location of the assembly plant. Detroit no longer serves as America’s Motor City, the industry having moved to other parts, to Alabama and Tennessee. Car buyers pay no attention. Mercedes are made in Georgia, Toyotas in Texas or Ontario, BMWs in South Carolina. The big U.S. automakers in Canada are shrinking, some perhaps to disappear completely. Governments pathetically compete with subsidies and grants to retain old firms or lure new ones, wasting their money on an industry that really needs no help — unless it is to overcome entrenched unionization or play off one jurisdiction against another.

Politics cannot compete with the ability of an innovative industry to deliver what consumers continue to demand: the comfortable freedom of self-driven transportation.

The sales rush of the past couple of years will continue, spurred now by dramatically lower gasoline prices. DesRosiers estimates lower gas prices will return $20 billion or more to Canadian consumers — after-tax dollars directly into the pockets of drivers.
Politicians may try to take that back, perhaps with a carbon tax. But if history is any guide, the world will drive on in a bright shiny new wild hectic red Mustang.

Regardless of where equity indexes are trading, investors always have their favourites: an industry leader with dominant market position; a growth name that’s posting revenue and earnings well above peers; a stable dividend stock that can be counted on for consistent payouts.

With that in mind, it’s always a good idea to take a look at some of the most expensive stocks on the S&P/TSX Composite Index. It’s a good way to gauge whether the equities you hold are outstripping their value by one measure or another.

For most of the Canadian equity benchmark, price-to-earnings multiples are a simple and widely used measure of valuation. But it doesn’t tell the tale in all sectors. In the mining space, for example, stocks are often measured using price to net asset value. This metric is much more popular than P/E in this sector because many resource companies are in the exploration phase and, therefore, have little or any earnings. Even the biggest players often have several projects in development, which, again, are not yet reflected in their earnings.

For the energy sector, enterprise value to debt adjusted cash flow makes more sense. Since this ratio is an after-tax calculation, it’s appropriate for industries with high resource taxes. It also factors in often-high leverage levels, which the industry is known for.

There are often pretty good reasons why companies trade at high valuations but that doesn’t mean investors aren’t overpaying. We’ll let you be the judge. Here are some of the most expensive stocks in Canada and reasons why they are so loved.

Imperial Oil Ltd. stands out with the highest enterprise value to debt adjusted cash flow (EV/DACF) among Canadian large-cap integrated oil and gas producers at 15.1. Cenovus Energy Inc. is second at 14x, based on Peters & Co. data from Jan. 5, 2015.

In addition to Imperial Oil’s very strong management team and its use of the same practices as majority owner Exxon Mobil Corp., it is also Canada’s market leader in gasoline distribution and refining. Since prices at the pump typically fall slower than crude prices, the company’s gas stations provide an important buffer that helps justify its high multiple. Also keep in mind that Imperial’s profit rose 45% in the third quarter as revenues picked up in its downstream and chemical businesses.

Canadian Oil Sands Ltd. at 31.2x EV/DACF and MEG Energy Corp. at 28.4x have the highest valuations among intermediate producers, but PrairieSky Royalty Ltd. also stands out at 23.9x. Since its assets — spun out from Encana Corp. in 2014 — are comprised of land granted by the government dating back to the late 1800s, the company doesn’t pay any royalties. Instead, PrairieSky leases the land to others and receives the royalties. Since it’s not doing the drilling, it doesn’t have any exploration risk, and, therefore, investors give it a higher valuation than many of its sector peers.

GOLD

Handout/GoldcorpGoldCorp's Cerro Negro mine, a high-grade gold mine located in the Santa Cruz province of Argentina.

Goldcorp Inc. is widely considered the highest-quality large-cap Canadian producer, and its valuation reflects this. The stock trades at a price to net asset value of 0.94, based on Scotiabank data from Jan. 5.

Among the senior producers, Goldcorp is a top pick of several analysts due to its healthy growth profile for 2015 and 2016, industry-low all-in sustaining costs, as well as its relatively strong balance sheet. The company expects its gold output will rise as high as four million ounces in 2016, and RBC Capital Markets analyst Stephen Walker believes its cost outlook will remain intact.

Newmont Mining Corp. is next at 0.89x net asset value, while Agnico Eagle Mines Ltd. is highest among intermediate gold producers at 1.08x. However, Goldcorp’s market cap is close to $20 billion, whereas Agnico’s is only about $7 billion.

Among royalty companies, Franco-Nevada Corp. at 1.61x net asset value is second to Osisko Gold Royalties Ltd. at 1.72x. But a better comparison for Franco-Nevada in terms of market cap would be Silver Wheaton Corp., which is at 1.2x, because Osisko Gold Royalties is so much smaller.

First Quantum Minerals Ltd. is considered by many to be the sector leader in terms of management and market credibility, and its P/NAV of 0.78 (using a 10% discount rate that accounts for things such as project risks, future cash flows and commodity price swings) reflects those strengths. However, Lundin Mining Corp. has gained a lot of relative ground in terms of investor sentiment as First Quantum has a big task in building the Cobre Panama copper project. The centrepiece of its nearly $5-billion acquisition of Inmet Mining Corp. was expected to be a source of large cost savings, something investors will continue to monitor closely.

First Quantum must also cope with tax changes in Zambia, where copper miners are set to endure a flat 20% royalty. More recently, it encountered problems at its Ravensthorpe operation in Australia. An acid spill forced the closure of the 38,000-tonnes-per-year nickel plant.

Lundin, meanwhile, is one of Credit Suisse’s top picks among diversified miners due to its exposure to various metals (copper, nickel and zinc), conservative balance sheet relative to peers, positive free cash flow and strong capital position.

The firm’s analysts noted that Lundin’s performance at its Eagle Mine has been impressive and the company is improving its record as an operator. They also suggested a possible dividend introduction in the second half of 2015 could be a positive catalyst. Lundin’s stock trades at 0.9x net asset value, based on Scotiabank data from Jan. 5, while Teck Resources Ltd., Canada’s largest diversified miner, is trading at 0.92x.

NON-RESOURCES

Chris Young/The Canadian PressFreshly-brewed coffee sits on a hot plate in a Tim Hortons outlet in Oakville, Ont.

Using the S&P/TSX 60 index as a base, a screen of the highest estimated year-ahead P/Es turned out many energy infrastructure names. This should come as no surprise given that these companies are healthy dividend payers with some degree of regulated returns, and they also are a play on the popular energy infrastructure theme, despite recent weakness in the sector due to dropping oil prices. TransAlta Corp.’s stock topped the group at 34.78x earnings, along with Pembina Pipeline Corp. at 29.3x, Enbridge Inc. at 24.77x, followed by Inter Pipeline Ltd. and TransCanada Corp. at around 22x.

Brookfield Asset Management Inc. also stood out at 31.05x due partly to its large real estate exposure and strong management team.

However, Tim Hortons’ new owner Restaurant Brands International Inc. had the highest P/E at 38.78 in this broader group as of Jan. 9. This can be attributed to expectations for heavy cost cutting by owner 3G Capital. As a result, the company’s EBITDA will likely be a lot higher than analysts currently forecast — a conservatism that stems from the lack of guidance from management.

“We believe that Burger King will apply cost disciplines to Tim Hortons similar to what 3G Capital employed with Burger King and other companies in beverages and packaged food,” said RBC Capital Markets analyst David Palmer after Tim Hortons shareholders approved the deal in December.

Specifically, he sees an opportunity to improve store efficiency as well as productivity at Tim Hortons’ warehouse business.

Loblaw Cos. Ltd. also warrants mention, particularly considering its P/E in January was above 180, the result of charges related to the spinoff of Choice Properties REIT, which holds a lot of Loblaw’s real estate assets. But even on a forward P/E basis, Loblaw’s multiple of 17.17 is significantly higher than its historical average closer to 10-12x. But that’s typical of a low interest rate environment when investors are willing to pay more for earnings.

A range of 12-15x would probably be more comfortable for investors. But there is a scarcity of non-resource companies in Canada, a lot of captive mutual fund money, and Loblaw dominates the grocery retail space.

Its acquisition of Shoppers Drug Mart Corp. was intended to help it fend off competition from the likes of Wal-Mart Stores Inc. and Target Corp. and that seems to be working so far. Same-store sales at Shoppers rose 2.5% in its third quarter and Loblaw’s revenue climbed 3.6% to $13.6 billion, with Shoppers accounting for roughly a quarter of that.

Lorenz Fischer* found his career as a high-tech systems manager unexpectedly terminated last year when his company was bought out by another. He became superfluous and departed without a company pension and just a year’s salary, $16,000 of which he promptly rolled into his RRSP and the balance went into his non-registered investments. His former salary, $12,000 a month, is history. Frugal, he now wonders if, at the age of 55, he has sufficient money for another 30 or 40 years of life left in his portfolio.

Even without a job, Fischer’s life is pleasant. He has a net worth of about $2.8 million, although a third of that is his $1-million house and another $75,000 is in antiques. That still leaves more than $1.7 million, which is currently well invested in diversified stocks and exchange-traded funds. His three-bedroom house has a fine view of the ocean, he drives a classic Benz convertible on sunny weekends, cooks for friends and travels to Europe every few years. Yet he laments his loss of employment. “I have been forced to retire prematurely, five years before I had intended,” Fischer says.

Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., is optimistic Fischer can make the numbers work. “Lorenz is fundamentally a saver,” he says. “The problem is to create a road map that will keep him out of trouble. If we do it and he sticks to the plan, he’ll make it through his involuntary retirement without financial grief.”

Fischer doesn’t have a mortgage or other debts, nor a spouse or children. His monthly expenses, net of savings and property taxes that he has deferred until the sale of his house, as B.C. allows for residents 55 and over, add up to just $1,900. He can cover that using approximately $836,000 of his non-registered financial assets returning just $25,080 or 3% a year after inflation. He will also have $1,284 from present TFSA savings at the same return rate. After average 10% tax, he would have $1,980 a month to spend. At 65, he can add his annual Canada Pension Plan of $9,345 and Old Age Security of $6,765 to push income to $42,474 a year or $3,000 a month after 15% average income tax.

Fischer could start to draw from his $800,000 RRSP at the assumed net rate of 3%, or $24,000 a year, to average out income and taxes or wait and allow earnings to compound until he turns 71 and has to convert to a RRIF, buy an annuity or take all cash and pay a huge tax bill. Waiting to take RRSP money through a RRIF could boost the tax rate later in life, but years of tax-free accumulation within the RRSP and during the RRIF make up for that, Moran says. It’s better to leave the RRSPs to grow for 16 years until they are tapped after he turns 71.

At that point, Fischer’s RRSPs will be worth $1.28 million and could produce a continuous income of $38,500 a year. His total income at age 72, assuming he has taken OAS and CPP at 65 and started his RRIF payments a year after turning 71, would be about $81,000 a year. After 20% average income tax and a loss of $1,350 to the OAS clawback, which begins to levy a 15% charge on taxable income over about $72,000 in 2015, he would have $5,300 a month to spend. His present expenses would be covered several times over.

“What this case shows is that unanticipated loss of a job is not always a ticket to poverty,” Moran says. “Lorenz is unusually frugal and he has good investments. He is not the average case, but he is a model case for what can be done by thoughtful, careful people.”

But Fischer’s frugal nature also reflects a pessimistic view of the future. “I need to consider a retirement plan,” he says. “There are choices: draw down my RRSPs, take CPP early at 60, do a reverse mortgage to take advantage of my high house price, or buy annuities.” Two issues Fischer raises — getting income for life from a reverse mortgage or an annuity — depend on the need for cash. Clearly, he doesn’t need the money either strategy would generate, but it’s worth considering what each alternative would mean.

The concept of the reverse mortgage, which is to extract income from equity, is entirely reasonable, says Don Forbes, a financial planner and chartered life underwriter who heads Don Forbes Associates Inc./Armstrong & Quaile Inc. in Carberry, Man. A loan is made against a home’s value and no payments are due until the home is sold or the owners die. But reverse mortgages use relatively high interest rates, because the lenders usually have to pay more to borrow than the banks and they have to bear the risk that borrowers may live to be centenarians.

Today, for example, a reverse mortgage with a 3.99% interest rate and additional fees required by the lender push the effective rate to 5.74%. Many banks in Canada continue to offer 2.99% mortgages. A person who wants to borrow against home equity can get money by mortgaging the house and then paying off the mortgage out of other income. Fischer has that other income, unlike others who have no alternative but to tap into their home equity via a reverse mortgage. Lorenz does not need a reverse mortgage, so it would be a bad deal for him, Forbes says.

An alternative is to purchase an annuity from an insurance company. An annuity is life insurance running in reverse, with a promise of income guaranteed for as long as the recipient may live and usually with a guaranteed minimum number of payments should death come early. Annuity returns are driven mostly by interest on government bonds. Interest rates are still near historic lows, so it is not a good time to buy an annuity. However, in a few years, if rates are higher, the combination of having more income paid in a shorter period — for life expectancy diminishes with age — could be worth Fischer checking out.

Buying an annuity with, say, 10% of RRSP assets at 60, then another annuity with similar assets five or 10 years later, will provide income in excess of straight interest and the tax advantage of that part of the payout is non-taxed return of capital. Fischer, without a wife or children, can choose a straight life annuity with the highest payout. Assuming that an annuity has a 4% rate of growth and pays out everything in 30 years, Fischer would get $4,950 a year for a $100,000 investment. With the same growth rate and purchase price, the same plan bought 10 years later when Fischer is 70 would pay $6,525 a year for 20 years. Finally, if the annuity with the same assumptions were bought to pay on the bet that he will live just 10 years, it would pay $11,400 a year.

These rates are mathematical and do not include tax characteristics, embedded fees or actual pricing of annuities on the market. The upside is that converting RRSP capital to an annuity guarantees a return for life no matter what. The downside is that fixed annuity payouts are vulnerable to inflation. If inflation rose from 2% today to 5% or 6% or more, annuity incomes would be gored and in, say, 20 years, half of the purchasing power you thought you were buying would have evaporated.